unsuitable economic conditions in Nigeria has been a major source of concern
among economic and policy makers in recent time. These economic problems can be attributed to
the existence of market failure and the inability of the price mechanism to
efficiently allocate scarce among economic agents.
sets out to examine the extent to which government intervention through
monetary policy has been able to regulate the economy by ensuring general price
stability and growth.
From the research
work, we discover that monetary policy, through the use of the instrument of
money supply but have not able to stabilize economic growth which as not been
able to regulate the general price level.
This work also
viewed the different schools of thought and their option about the use, effects
and setbacks of monetary policy in stabilization of an economy, the Classical
and the Cambridge model view money as a store of value and they believe that
increase in money will cause same increase in prize, while the Keynesian argued
that money is demanded for 3 purposes and concluded with their liquidity theory
and lastly the monetarist they believed that demand is a stable function
variable and money supply.
This work also
focused on the means or mechanism through which this policy is been effected in
the economy, the apex bank been the avenue through which the government extend
this policy, the apex bank also through some means which include a direct and
indirect mechanism extend this policy to the commercial banks and then to the
work consist of a dependant variable in its hypothesis and some independent
variable to explain the importance of monetary policy and its effect on the
prize and Gross Domestic Product (GDP) in the economy, a least square
regression method was adopted to derive the significant of the independent
variable on the dependent variable. A
data covering the duration of 32 years was introduced in the model; the result
was established, interpreted and concluded was drawn with recommendation.
CHAPTER ONE: INTRODUCTION
1.1 Statement of problem
1.2 Significance of Study
1.3 Objective of Study
1.4. Research Hypothesis
1.5 Scope of the Study
1.6 Organization of Study
1.7 Limitation of Study
CHAPTER TWO: THEORETICAL FRAMEWORKS AND LITERATURE
Review on Monetary Policy
2.1 Goals and Objectives of Monetary Policy
2.2 The Tools of Monetary Policy
2.3 The Classical View and Its Criticisms
2.4 The Keynesian and Its Criticisms
2.5 The Monetary View and Its Criticisms
2.6 The Synthesis of the School of Thought
3.1 Statement of Hypothesis
3.2 Sources and Methods of Data collection
3.3 Statistical and Economic Test
3.4 Data Presentation
4.1 Data Analysis
4.2 Analysis and Presentation of Result for
4.3 Analysis and Interpretation of Result
4.4 Analysis and Presentation of Result for
4.5 Analysis and Interpretation of Result
4.6 Economic Implication or Results
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of the Findings
5.2 Policy Recommendation
1.0 BACKGROUND STUDY
over the world experience one form of fluctuations or the other at different
times. These fluctuations are usually beyond the ability of the market working
through the price to cushion them. Hence, market failure.
A key of all
central banks including the Central Bank of Nigeria is to promote and maintain
monetary stability and a sound financial system. The assumption is that this
will help encourage long term planning, aid infrastructural development,
attract foreign investments and engender economic growth. While the central
bank is totally responsible for the promulgation of sound monetary policies in
order to aid the attainment of the above objectives, the formulation of
fiscals' policies, which also affects the achievement of the above objectives,
however falls on the wider government, particularly the Ministry of Finance.
Given the both monetary and fiscal policies impact on economic growth and
development, it is not surprising that they are entwined. This relationship has
been explicitly explained thus:
are inextricably linked in macroeconomic management; developments in one sector
directly affect developments in the other. Undoubtedly, monetary policy is
usually concerned with the use of hanges in money supply and/or interest rates to
influence the level of economic activity. It is anchored on the use of all or
some of the following policies: Open Market
Operations, Liquidity Rations, Rediscount Policy, Minimum Reserve Requirement
and Sectoral Credit Guidelines.
On the other
hand, fiscal policies involves the use of taxes and changes in government
expenditure to influence the level of economic activity (Ekpo, 2003, p.15)
affects the disposable income of citizens and corporations, as well as the
general business climate. In this regard, the interrelationship between public
spending and private sector performance is of paramount importance. On one
hand, Government expenditure can provide an impulse for private sector growth,
while on the other, it can be harmful if it results in budget deficits and
leads to competition for scarce financial resources from the banking sector as
the government seeks to finance the deficit. In such circumstances, the
crowding out of the private sector by the Government sector can outweigh any
short-term benefits of an expansionary fiscal policy.
The key to all
these therefore lies in striking a good balance in fiscal management. Having
enough expenditure outlays to meet the needs of Government and support growth,
but not so much as to deny the private sector the resources it needs to invest
This has the
potentials of destabilizing the macro-economic environment thereby retarding
economic productivity and development. The objective of this paper is to review
the practice of monetary in Nigeria since independence. In doing so, we hope to
explore the following issues: the link between government and development; how
monetary policy have affected past developmental programmes in the country,
and; the difficulties of conducting monetary in a deregulated environment and in
an era of globalization.
According to the
classical economists, it is the "invisible hand" of price mechanism
that regulates the economy and determines what, how and whom to produce goods
and services. It is a well-known fact that the "invisible hand" of
price mechanism as propounded by Adam Smith has not been able: to effectively
stabilize the economy in the practical sense. This could be attributed to the
emergence of market imperfections: where market fails to efficiently allocate
and distribute scarce economic resources.
Given this, the
Government in order to attain a second-best situation, usually adopts measures
such as fiscal policy and income policy to reduce the effect of these
fluctuations. In this study, our interest is in monetary policy measures and
their effectiveness in an import-dependent economy.
In an attempt to
define the term monetary policy, the word "Policy" is first defined
as a formulated idea or action used to achieve specific goals or objectives. On
the whole, monetary policy can be defined as formulated plans or actions by
government through the monetary authorities to regulate the volume, supply and
cost of money in order to achieve certain goals and objectives.
dictionary of Economics (2003) defines "Stability" as the condition
for a system to revert its original condition after a disturbance, or to speed
up the rate at which it does so. Thus, the term "Economics Stability"
cannot be described as not economics stability per se nor is it a state of
static equilibrium. Rather, economics stability can be defined as a situation
where by if there is disturbance or distortion, the system is not adversely
There is no doubt
that the volume and growth of money stock and the structure of interest rates
play an important role in the operation of the macro economy.
Hence, this study
seeks to assess the effectiveness of monetary policy as a tool of economics
1.1 STATEMENT OF PROBLEM
There is no consensus among economist of the different schools
of thought with regards to the effectiveness or even appropriateness of using
monetary policy as a weapon of economic stabilization.
Although some progress has been made by Central Bank of
Nigeria (CBN) towards resolving the structural imbalance in the economy, there
is still a lot of disagreement of monetary policy in Nigeria
There is also the problem of which goal should be assigned
to monetary policy since it cannot be used to achieve or pursue all the
Macro-Economic goals. This is because of conflicts in goals and the trade-off
that exists among some Macroeconomics aggregates. It is in
view of these problems that this study is being undertaken.
1.2 SIGNIFICANCE OF STUDY
1. The study will help monetary
authority to identify some lapses and short-comings on their own part in the
implementation of monetary policy
2. The study will be important
to policy makers especially the Federal Government and the Central Bank of
Nigeria (CBN) who will from it, know best the instrument of credit control
issued by CBN to other banks and financial institute could be effective in
economic stabilization in Nigeria
3. The study will assist
monetary authority in evaluating the true economic realities of the country by
formulating monetary policy for specific economic goal.
4. This study will also aid
policy makers decide on appropriate policy instruments needed to achieve the
ultimate macro-economic objective of attainment of high rate of economic growth
1.3 OBJECTIVE OF STUDY
The study will seek to offer useful and meaningful
suggestion on how to improve monetary policy performance in order to achieve
certain desired objectives
The study will also look at the extend to which monetary
policy has succeeded in the maintaining relative stability in these
In view of the persistent economic instability being
experienced in the Nigerian economy, the study will therefore attempt to
establish the extent to which money supply affects economic growth and the
general price level.
hypothesis to be tested will help bring the research work to a firm conclusion
through empirical analysis.
The central or
general hypothesis of this study is that monetary policy is an effective tool
for regulating an import-dependent economy like Nigeria.
hypotheses are stated below:
Ho: There is no significant relationship between
changes in money supply and changes in general price level in Nigeria.
H1: There is significant relationship between
changes in money supply and changes in general price level In Nigeria.
Ho: Variation in Gross Domestic Product (GOP)
cannot be explained by variation in the stock of money supply
H1: Variation in Gross Domestic Product (GOP)
can be explained by variation in the stock of money supply
1.5 SCOPE OF THE STUDY
This study will
focus on monetary policy, its formulation and implementation. The work will
cover the effectiveness policy in Nigeria economy in Nigeria for the period
between 1970 - 2003. This time series data is quite appropriate because it
covers when the Nigerian economy fluctuated between boom and recession.
1.6 ORGANIZATION OF STUDY
work will be divided into five (5) chapters and each chapter is presented as
Chapter One is the
introductory chapter which gives insight into the background of the study. It
also states the problem of the study, highlights the objectives of the study,
states the hypothesis of the study and the significance of the study.
Chapter Two focuses on the
theoretical underpinning and literature review. The contributions of economist
of the different school of thought will be reviewed in this chapter
Chapter Three centers on the
statement of hypothesis, data collection and econometric/statistical tests of
Chapter Four is based on
empirical analysis of data tested in his chapter three are interpreted
Chapter Five will round up the research work, as it would summarize previous
chapters and findings in the course of the research work would be made based on
the result gotten via the hypothesis test and other empirical analysis employed
1.7 LIMITATION OF STVDY
The data used in
this research work is limited due to the errors that may have occurred during
the military era, where data are vague in nature; due to this the reflection of
the result may not be conclusive.
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