ABSTRACT
Monetary policy consists of discretionary measures
designed by monetary authorities to regulate and influence the supply, cost and
direction of money and credit provided to the economy. This aspect of
macroeconomic policy remains one of the cornerstones of economic policy
formulation and implementation. Monetary policy is relevant irrespective of the
economic framework in place.
With the adoption of the inflation, this study examine the
impact of monetary policy in Nigeria using econometric techniques, a model that
captures the impact of inflation on monetary policy is specified and estimated
using the techniques of Ordinary Least Square for the period of 1985-2008.
The main findings emerging in this study indicated that
the demand for money has an inverse relationship between the level of interest
rates and inflationary rates. The study also advocated for the inclusion of
partial adjustment scheme while modeling money demand functions and hence
monetary policy in Nigeria.
LIST OF FIGURES
Fig. 1 The Demand Curve for Legal Tender in
both Equations give a Rectangle Hyperbole 29
Fig. 2 The Relationship Between Money Supply
and the Value of Money
Fig. 3 Extreme Keynesia View of the
Impossibility of Equilibrium Solution at Full Employment
TABLE OF CONTENTS
Title page
Certification
Dedication
Acknowledgement
Abstract
Table of Contents
CHAPTER ONE
1.0 Introduction
1.1.1 Review of
Monetary Policy In Nigeria
1.2 Statement of
Problem
1.3 Relevant
Research Questions
1.4 Significance
of the Study
1.5 Objectives of
the Study
1.6 Statement of
Hypothesis
1.7 Methodology of
the Study
1.8 Limitation of
the Study
1.9 Organization
of the Study
1.10 Definition of
Terms
References
CHAPTER TWO:
Theoretical Framework and Literature Review
2.1 Historical
Background
2.2 The Worldwide
Decline in Inflation
2.3 Theoretical
Analysis of Monetary Policy as a Means
to Control Inflation
2.4 Monetary
Policy in Nigeria
2.5 Theoretical
Framework
2.5.1 Theoretical
Foundation of Monetary Policy
2.5.2 Monetary Policy
and the Balance of Payment
2.5.3 Supply and Demand for Money
2.6 Literature
Review
2.6.1 Empirical
Studies on the Effectiveness of Monetary Policy
References
CHAPTER THREE
3.1 Methodology
3.2 Method of Data
Collection
3.3 Processes
involved in Data Collection
3.4 Research
Design Methodology
3.5 Research
Questions and Research Hypothesis
3.6 Characteristics
of the Study Population
3.7 Sampling
Designs and Procedures
3.8 Data
Collection Instrument
3.9 Pilot Study:
Validity and Reliability
3.10 Techniques and
Procedure for Processing
3.10.1 Identification of Variables
References
CHAPTER
FOUR
4.1 Presentation
and Analysis of Data
4.2 Criterion Group Returns: Characteristics and
Classification Respondent
4.2.1 Economics a
Priori Criteria
4.2.2 Statistical
Criteria
4.2.3Economic Criteria
4.3 Model
Specification
4.4 Presentation
and Analysis of Data
4.5 Interest Rate
4.6 Money Supply
4.7 Characteristics
of Inflation Rate Variable
4.8 Analysis of
Result
References
CHAPTER FIVE
5.0 Summary, Conclusion and Recommendation
5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
Bibliography
CHAPTER ONE
1.1 INTRODUCTION
Monetary policy plays a very crucial role in any economy,
being the channel through which financial resources flow from one segment of
the economy to the other. It, therefore, represents the major foundation of the
modern market economy. Essentially, there are three pivotal roles for the
monetary policy namely; the Monetary Policy role, the financial stability role
and the overall economic role. Monetary policy in the current Nigeria context,
encompasses actions of the central bank that affect the cost and availability
of commercial and merchant bank's reserve balances and thereby the overall
monetary and credit conditions in the economy (Akaku, 1993) .The primary goal
of such actions is to ensure that overtime, the expansion in money and credit
will be adequate for the long run need of the growing economy at stable prices.
The short-run objective of monetary policy however
include, combating inflationary pressure, restoring a sustainable balance of
payment, attainment of full employment level of resources, equitable
distribution of income, maintaining a stable exchange rate at internationally
competitive level . Sometimes, changes in monetary are undertaken as part of
concerted actions to remove obstacles to the growth of savings and efficient
allocation of investment.
As is often the case ,the pursuit of these short -term
goals tends to conflict with the basic goal of stable, long-term for example, a
vigorous anti-inflationary stance would typically require the sacrifice of output growth in the short term. The same might be the
case where priority is given to restoring a healthy balance of payments.
Similarly, a stable exchange rate objective might call for a tighter control on
aggregate demand which would in turn adversely impact output. Moreover, attaining
the objective of exchange rate stability at local currency, with attendant cost
pressure on the price level. In sum, difficult trade-offs are inherent in the
conduct of monetary policy, making the central bank, a target of criticism and
various kind of pressures. Over the years, the objectives of monetary policy
have remained the attainment of internal and external balance. However,
emphases on techniques/instruments to achieve those objectives have changes
over the year. The major phase in the pursuit of monetary policy that is being
examined was between 1992 to 2006. The economic environment that guided
monetary policy before 1986 was characterized by the dominance of oil sector,
the expanding role of the public sector in the economy and over dependency on
the external sector. in other to maintain price stability and a healthy balance
of payment position, monetary management depended on the use of direct monetary
instrument such as credit ceilings, selective credit controls, administered
interest and exchange rates, as well as the prescription of cash reserve
requirements and special deposits. The use of market based instruments was not
feasible at that point because of the underdeveloped nature of the financial
markets and the deliberate restraint on interest rates.
However, as a result of the crash in international oil
market in the 1980s and the resultant deteriorating economic conditions, the Structural adjustment Programme (SAP) was adopted in July,
1986. This programme was designed to achieve fiscal balance and balance of
payments viability by altering and restructuring the production and consumption
patterns of the economy, eliminating price distortions, reducing the heavy
dependence on the crude oil exports and consumers good imports, enhancing the
non-oil export base and achieving sustainable growth. Other aims were to
rationalize the role of the public sector and accelerate the potentials of the
private sector.
Given the important role that well-functioning monetary
policies has on monetary policy, financial stability and overall economic
activity, the Central Bank of Nigeria has put in place a set of national
monetary policies objectives as a broad guideline and framework for all
monetary policies initiatives. In setting out the objectives of the National
Monetary policies, the goal is to ensure that the system is available without
interruption, meet as far as possible all user& needs, and operate at
minimum risk and reasonable cost.
During the course of the past ten years the Central Bank
of Nigeria (CBN), in collaboration with the Bankers Committee, launched the
first major initiative to modernize the monetary policy. The starting point was
to automate the cheque clearing system and making it a veritable platform for
development of electronic payment channels. Hitherto cheques processing and
computations of the net settlement position of banks were done manually. The
implementation of the new procedures and rules based on MICR technology
revolutionized the cheque clearing system. Consequently, a Centralized
Automated Clearing process was established
in Lagos clearing zone, whereby with MICR Reader Sorters, necessary information
on cheques are captured, built into clearing files and electronically
transmitted to the clearing house, from where the net settlement position of
participating banks are automatically computed and also electronically
transmitted to the Central bank for final settlement.
The role of monetary policy in the management of inflation
is an important topic that goes a long a way to help in nation building. It can
also be seen as an academic point of knowledge to students on the type of
monetary policies that exist and the best that can help manage inflation.
A monetary policy is a set of instructions and procedures
used for the transfer of value and settlement of obligations arising from the
exchange of goods and services within a defined market. The ultimate goal of
any monetary policy is to ensure that exchange of monetary value is achieved
with the least risk, inconvenience and cost. For a monetary policy to be
described as efficient therefore, it must be reliable, prompt, accessible,
secure, and cost effective.
The I970s witnessed a burst of creativity in the
establishment of electronic monetary policies in the Western world, but there
was a relatively slow rate of adoption by consumers and businesses. However,
these initial setbacks did not deter the initiators of these innovative modes
of payment. Today, advancements in technology have made possible the
introduction of diverse electronic payment instruments, which were unheard of a
few decades ago.
The Nigerian Monetary policy has not grown beyond the
traditional reliance on cash. The use of cheque as a mode of payment is only
beginning to gain some level of acceptance: but skepticism and lack of trust is
still quite high. As a result, most Nigerians, and even corporate entities are
averse to accepting cheques as instruments of payment, preferring cash or at
best, certified cheques. Cash however has its own limitations, which make it an
insecure, cumbersome and unreliable mode of payment, especially for high value
transactions.
The limited electronic payments techniques in the Nigerian
financial system have resulted in limited acceptance, and at times, total
rejection from end users and other players in the payments process. However,
because the Nigerian monetary policy is an integral part of the global monetary
policy especially in this era of globalization, ecommerce, and technological
advancements, the Nigerian monetary policy must be reformed to meet global
standards as well as the needs of local consumers.
Over the years, the Nigeria monetary policy has witnessed
tremendous development form its rudimentary level during the early years of
banking business to a fairly development system. The Nigeria monetary policy
and' settlement system combines some elements of the sophisticated architecture
that features in advanced economics and some elements of primitive economy. The
system is predominantly cash-driven, as evidenced by the value of currency
outside the banking system.
A nation's monetary policy is an integral part of its
financial and monetary structure. The efficiency or otherwise of the monetary
policy affects the economy in many ways.
The monetary policy is a vital link between the financial
system and the real sector of the economy'. The payment instrument in Nigeria
is predominantly cash. The prominence of cash for transaction purposes increases
the volume of currency in circulation or high powered money, which renders
monetary control difficult, if not impossible. There is general consensus in
the literature that an inefficient monetary policy distorts the transmission
mechanism of monetary policies, even when the design and objectives are
laudable (Nnanna, 1999).
The Nigerian monetary policy is still at the rudimentary
stage. According to a study by Accenture, at least 90% of transactions are
based on cash as the medium of value transfer. (Source: See Proceedings of
Smartcard Expo 2002). The setbacks the system has suffered over the years as a
result of its over-reliance on cash has necessitated the call for a reform of
the monetary policy to reduce the level of cash in circulation and move it
towards a near-cashless society.
1.1.1 REVIEW OF
MONETARY POLICY IN NIGERIA
The Sub-Committee was set up at the February 2004 meeting
of the Bankers' Committee with a mandate to review and enhance the efficiency
of the existing monetary policy.
The Members of the Sub-Committee include: ACCESS BANK,
CBN, FIRST BANK, GTB, MAGNUM TRUST, NIB, NIBSS, STB, ZENITH BANK.
To achieve its mandate, the Committee set out the
following as guiding principles:
Vision: To establish a monetary policy that is secure,
efficient, reliable, cost effective and consistent with world-class global best
practices by April 1, 2006.
Mission: To create an efficient monetary policy that
deploys reliable, secure and convenient Information and Communication
Technology (ICT) tools to satisfy the financial transaction needs of the
Nigerian economy.
In the Nigeria economy, the study of Inflation, interest
Rate and exchange rate as well as the monetary and fiscal development yield a
mixed result, for example, while interest levels in over a decade and credit to
the private sector has grown at unprecedented annualized level of about 39
percent (higher than the target of 30 percent under needs), thereby, spurring
rapid level growth of the non-oil sector, the inflationary pressure have been
worrisome. The broad money supply (M2) has growth at about 22 percent at the
end September (as against the target is for end period 2006). The rise in M2
reflected the increase in aggregate credit (net) to the domestic economy as
well as the rise in net foreign assets, through the magnetization of the 2004
excess crude earning and increase benchmark oil price for fiscal 2005.
The foreign exchange market remained stable, and the Naira
has appreciated against all major currencies in all markets. At the Das market,
the Naira/ Dollar rate has appreciated to about Ni 29.55 (down from N132.85 at
the beginning of 2005), and the inter-bank rate also of appreciated to about
N132 (down from N137). The Naira has also appreciated against the pound
sterling and the Euro in both the official and parable markets.
1.2 STATEMENT OF
THE PROBLEM
The direct approach to monetary management was in vogue.
Under this approach, the most popular instrument of monetary policy was the
issuance of credit rationing guidelines, which primarily set the rates of
change for the components and aggregate commercial bank loans and advances to
the private sector. The sectorial allocation of bank credit in CBN guidelines
was to stimulate the productive sector and thereby stem inflationary pressures.
The fixing of interest rates at relatively low levels was done mainly to
promote investment and growth. Occasionally, special deposits were imposed to
reduce the amount of free reserve and credit- creating capacity of the banks.
Minimum cash ratios were also stipulated for the banks in the mid-1970s on the
basis of their total deposit liabilities.
With the adoption of financial liberalization programme
under the auspices of SAP and the changes from direct to indirect approach to
monetary management, this study investigates the role of this programme on
monetary policy in Nigeria. Specially, the basic question to be addressed in
this study is: how effective is the conduct of monetary policy upon the
liberalization of the financial sector in Nigeria? To what extent could
monetary policy be relied upon for the achievement of macroeconomics objective
in Nigeria?
These questions are very important because deregulation
and changes in financial markets in recent years have had widespread
implications for the conduct of monetary policy in several countries. Sample
and well-behaved relationships between money and nominal income that existed
under the regulated framework have apparently broken down in the changed
financial environment.
With inflation in the financial sector in Nigeria, the
assessment of its impact of this policy change on monetary policy becomes
crucial. This is so because monetary policy is greatly relied upon for the
achievement of macroeconomic objectives in Nigeria. It is an indisputable fact
that the main objective of any country is to achieved growth in the economy
which transcend into improvement in the standard of living of the people, to
this end, efforts are made to maintain effectiveness of its monetary policy.
This study, however, seeks to address the effect of monetary policy on monetary
policy and its use as a tool used for the management of inflation within the
household organization, society and the economy of Nigeria as a whole.
1.3
RELEVANT RESEARCH QUESTIONS
The study became relevant due to the increase in inflation
in the developing countries which Nigeria is one of. Certain questions are
required to achieve the aim of this research; these questions include:
1. What are the
roles of CBN in the Nigeria monetary policy?
2. Does monetary
policy have effect on inflation?
3. Is there any relationship between monetary
policies and Gross Domestic Product (G D P)?
4. Does inflation has effects on individual
industry and economy as a whole?
5. Is monetary
policy not effective in controlling inflation?
6. Does monetary
policy have effect on money supply?
7. What is the view of the CBN concerning the
value of the Nigeria currency (Naira)?
1.4
SIGNIFICANCE OF THE STUDY
In Nigeria, development in the monetary policy since the
eighties has been more positive but inflation on the other hand has been on the
rise except for the fact that recently the Central Bank of Nigeria (CBN) had
decided to regulate the system. Hence it is incumbent to carry out research
such that can bring about a link between the monetary policy and management of
inflation. Therefore the significance of the subject can be trace to:
·
The need to provide
a link between monetary policy and inflation management.
·
The need to enhance
the efficiency of Nigeria monetary policy is an effort towards meeting global
standards.
·
The need to show
monetary policy instrument and channel and the core principle of monetary
policy.
There is no doubt that efficient and effective payment is
a necessary prerequisite for the development and functioning of any economy.
Indeed, an efficient monetary policy is most essential in any economy and
determines to great extent its growth. Therefore, the Central Bank generally
takes a keen interest and oversight in the functioning of a monetary policy in
order to maintain the stability and growth of the financial system and to
manage inflation.
1.5
OBJECTIVES OF THE STUDY
The study of the role of monetary policy in the management
of inflation in Nigeria is of paramount importance and the aim of the study is
as follow:
i. To show how effective and efficient
monetary policy can generate economic growth and to evaluate monetary policy in
Nigeria.
ii. To
provide an insight, based on the findings of this study, on measures improve
monetary control in Nigeria.
iii. To show the economic meaning and the
importance of liquidity management through an effective and efficient monetary
policy at ensuring stability and growth in the economy.
iv. To identify an integration between monetary
policy and inflation management.
v. To investigate the relationship between demand for money
and inflation.
vi. To
identify various variables that influences liquidity management in an economy,
due to monetary policy and its component.
This study is aimed at reviewing and supporting the fact
that a well-functioning monetary policy is of primary importance, especially in
the implementation of monetary policy and particularly in inflation management.
1.6
STATEMENT OF HYPOTHESIS
The statement of the hypothesis will be based on two
contrasting statistical parameters; the null hypothesis denoted by HO and the
alternative hypothesis denoted by Ha. These hypotheses are to be used to
ascertain the claims of the feasibility and positivity of the research work or
when the demand is not met. The hypotheses for this topic are used as follow:
Ho: Underdeveloped financial structure market in
the Nigeria economy does not limit the effectiveness of monetary policy.
HI: Underdeveloped financial structure and market
in the Nigeria economy limit the effectiveness of monetary policy.
Ho: Inflation does not have any effect on
individual industry and economy as a whole.
H1: Inflation has effect on individual industry and
economy as a whole.
Ho: Measure to stabilize the price does not have
any effect on other objective of the economy.
H1: Measure
to stabilize the price has effect on other objective of the economy.
Ho: Measure to create employment does have any
effect on other objective of the economy.
H1: Measure to create employment has effect on
other objective of the economy.
1.7 METHODOLOGY
OF THE STUDY
The methodology for this research work will take a
secondary order, economic research centres and the central bank of Nigeria. It
will equally cut across the technical individuals who in one way or the other
had the stance to economic analysis theoretically and practically.
The banking world encyclopedia and the IMF shall be
considered during the research work as they will be of strong advantage in the
analysis of the research topic. Journals from these bodies shall be considered
and term papers related to the topic will also be sought for information.
1.8
LIMITATION OF THE STUDY
This research work is limited to the role of monetary
policy in the management of inflation in Nigeria. It shall explain basically
the essence of monetary policy and inter-relationship between monetary policy
and inflation. It shall enrich its contents by making write-ups on those agencies involved in the banking
sector, but mostly, it will base itself to the Central Bank Of Nigeria as well
as the policies of government towards monetization and the influence of IMF and
the World Bank.
The research work will not deal with any other monetary
aspect of finance other than the ones stated above. It will not take into
account any political cases involving finances or related course; it shall not
talk about the laws following such conditions as well.
1.9
ORGANISATION OF THE STUDY
This study comprises of five chapters, chapter one will be
introduction part which comprises of what exactly the topic is all about. In
the chapter, the objectives, limitation, statement of the problems, significance
of the study, statement of the hypothesis and an oversight of the methodology
as well the organisation of the write-up are treated. Chapter two will comprise
of the literature review which will contain both empirical and theoretical
literature review. It will visit some advanced countries that had used the
monetary policy as a mean to manage inflation as well as the Nigeria experience
since it had begun to experience various means of monetary policies and the
role it had played in the management of inflation. Book and web sites visited
will be cited in this chapter. Chapter three will contain the methodology used
for achieving the objectives stated earlier in chapter one. It will contain all
the tools used for analysis and how they were employed as well as when it was
employed.
In chapter four, the result of the research will be
discussed and mathematical, statistical and analytical results shall be
explained. Graphical illustrations and mathematical inferences will be stated
as well to show how monetary policy can be used to achieve management of
inflation. The final chapter will contain the conclusion derived from the
research. It will contain all inferences drawn from the result obtained from
the research carried out. It will also contain recommendation for future
research. It will also contain recommendations made to government to take note
when making polices, it will equally give information to the bank sector on how
best the monetary policy they employ is and give advice on better methods.
1.10 DEFINITION
OF TERMS.
Inflation: can be defined as a constant Increase in Price
of commodity.
MONETARY
POLICY: A monetary policy is a set of
instructions and procedures used for the transfer of value and settlement of
obligations arising from the exchange of goods and services within a defined
market.
Management: Is
defined as the act of running and controlling a business or similar
organization using a particular rule or principle (Olayemi, 2002)
Hypothesis: is
an idea or explanation something that is based on a few known facts but that
has not yet been proved to be true or correct (Oxford advanced learner, 2002).
Globalization: is something that has to do with the whole world. It may
also refer to something that has to do with the whole part of a country.
E-commerce: is
the act of transacting business via the electronic medium, It is equally the
process of buying and selling goods and service through the electronic means.
Deregulation: According
to Investor Glossary, Deregulation is an act by which the government regulation
of a particular industry is reduced or eliminated in order to create and foster
a more efficient marketplace.
Deregulation is usually enacted to weaken government
influence and forge greater competition (Weekly Trust, 2009).
Innovation: The
term innovation refers to a new way of doing something. It may refer to
incremental and emergent or radical and revolutionary changes In thinking,
products, processes, or organizations (Wikipedia, 2009).
Conquest: Success
in mastering something difficult
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