TABLE OF CONTENTS
TITLE
PAGE
CERTIFICATION
DEDICATION
ACKOWLEDGEMENT
TABLE
OF CONTENTS
CHAPTER ONE
HISTORICAL
BACKGROUND OF THE INTRODUCTION
1.1
Historical Background Of The. Study
1.2
Introduction
1.3
Statement of the problem
1.4
Research objectives
1.5
Research questions
1.6
Research hypothesis
1.7
Model specification
1.8
Significance of the study
1.9
Scope/Limitation of study
1.10
Method of data collection
1.11
Literature review
1.12
Organisation of the study
1.13
Contribution to knowledge
CHAPTER
TWO
LITERATURE REVIEW
2.1
Literature review
2.2 Historical background of the study
2.3.
Definition and concepts of monetary
approach
2.3.1
Balance of payments
2.3.2
Balance of payments adjustment under
fixed exchanged
rates
regime
2.3.3
Balance of payments adjustment under free
floating exchange
rate
regime
2.4
The control of the stock of money
2.5
Review of existing empirical evidence
on the monetary approach
2.5.1
Evidence from industrial economics
2
.5.2 Evidence from developing economics
CHAPTER THREE
RESEARCH METHODOLOGY AND METHOD OF
DATA COLLECTION
3.1
Research design
3.2
Research sample
3.3
Research instrument
3.4
Research techniques
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION OF
RESULTS
4.1
Method of data analysis
4.2 Data
analysis and Interpretation
CHAPTER FIVE
5.0 Summary, conclusion and
recommendations
5.1
Summary
5.2 Recommendations
5.3
Conclusion
References
CHAPTER ONE
1.1.
HISTORICAL BACKGROUND OF THE STUDY
The
monetary approach to balance of payments (MABP) has been a dominant view in the
International Monetary Economics, particularly; the theory is believed to' have
a long historical background. Which can be traced back to the writings of the
classical economists who conceived a system of integrated world capital market
and mobility? It is linked to the origin of balance of payments theory in the
work of David Hume, and more specifically, to this theory of price-specie-flow
mechanism (Johnson, 1976). While criticizing the objective of mercantilism in
accumulating precious metals, David Hume pointed out that the amount of money
in a country would be adjusted automatically to the demand for it. In Hume's
analysis, the process in which this adjustment takes place is through surpluses
and adjustment deficits in the balance of payments brought about by changes in
relative national money price levels. However, while drawing heavily from Humes
theory of balance of payments, and this analysis of price-specie flow mechanism, the monetary approach places emphasis'
on monetary considerations in the interpretation of external balance problems
rather than on changes in relative national price levels (Dornhusch and
Fischer, 1990, 764).
The
balance of payments account in Nigeria since political independence has
undergone periods of boom and doom at different stages. The period of boom has
been short-lived and is essentially attributed to the unprecedented increase in
the oil price of 1973 - 1974. Apart from this period, Nigeria has continued to
experience serious problems In the balance of payments position and the problem
became severe in the early 1980' s. From an overall surplus of about N2A
billion in 1980 in Nigeria's balance of payments, the country recorded a
persistent deficits of (N3 billion), (Nl.4billion) and (0.3billion) in 1981, 1982
and 1983 respectively.
The
internal factors that are responsible for the adverse balance of payments
position in Nigeria include among
other things, excessive demand for foreign products, heavy reliance base,
political instability and structural rigidities in the domestic production
process. The weaknesses, in the domestic macroeconomic policies have tended to
the problem. Moreover, the trade and exchange rate policies pursued during the
oil boom era of 1970s and early 1980s failed to generate the required
incentives for earning or saving foreign exchange. Rather, they resulted in
several macroeconomic distortions and entrenched import-oriented consumption
and production patterns in Nigeria which widened the trade gap.
With
respect to the monetary approach to balance of payment under a fixed exchange
rate regime, this studies focused on the influence of changes or growth in
determination of money demand as well as domestic component of money supply in
changes or growth in external reserves.
The: results of these studies in most cases
support the propositions of the monetary approach. For instance, Courechence
and Youssefs (1967) study of the relative influence of imports and money supply
on the demand foreign exchange reserves for a group of nine countries(Switzerland,
Netherlands, Denmark, Sweden, Germany, Belgium, Italy, Japan and Australia)
indicates that money supply is superior to the level of imports in determining
the level of foreign reserves. Their empirical 'results indicate that money
supply and long-term interest rate are arguments in the demand function
for individual country's foreign exchanges reserves. From their study,
Courchence and Youssef conclude that "the application of the concepts of
monetary theory to the field of international payments can be very fruitful.
The
basic concepts of the monetary approach can be found in the works of Frenkel and
Johnson (1976), Musa (1974, 1976), Johnson (1958, 1972, 1976a, 1976b and 1977).
Copppock (1978), Melvin (1984) and Uddin (1985). Other contributions to the
development of the monetary approach to balance of payments (MABP) theory
include. Mundell (1968), Dornbusch (1971), Tsiang (1977) and Bilson (1978). The
central argument of the MABP is that external balance problems are essentially
(but not exclusively) Monetary in nature. As such, the proponents of the
monetary approach argue that the:
"Balance of payments problems in a
monetary world should
be analysed by models that explicitly
specify monetary behaviour
and integrate it with the real economy
rather than by models
that
concentrate on real relationships and real monetary behaviour as a residuance of
real behaviour".
1.2 INTRODUCTION
Monetary
approach exerts its influence on the economy through changes in money supply
and interest rates. These variables also tend. to effect the position of the
balance of payments at any point in time. Monetary approach deals only with the
ultimate effect and not with the channels through which this effect occurs.
Thus monetary approach is essential for sensible discussion of the balance of payments and that the money demand
function and money supply process should play a central role in the balance of
payments analysis, particularly for the long-run.
The
monetary approach to the balance of payments dates back to David Hume's
refutation by use of the analysis of the price-specie-flow mechanism of the
mercantilist belief that a country could achieve a persistent external surplus
by import-substitution and export promotion approach.
The
reveal of the monetary approach was brought about through the growing
reluctance of countries to resort to either-devaluation or appreciation of
their domestic currencies to current external imbalance, together with the
imposition of restraints on the ability of countries to use exchange controls
and trade interventions respectively through the restoration of European
currency convertibility in 1958 and successive common markets among 'countries.
The restoration of the monetary-theoretic aspects of the balance of payments
and included in the work of Hahn (1959), Kemp (1970) and Khan and Argy (1971).
With
the continuous application of monetary approach in Nigeria coupled with the
other economic policies aimed at solving the imbalance in the international
trading and payments position, Nigeria has not been able to achieve viability
and precision in its external reserve position. Among these studies are Gray
(1963) which examined the effects of credit creation for investment purposes on
the balance of payment for Nigeria's first- National Development Plan Period,
Olofin et al 1986 which examined the effects of devaluation on the macro
economy, Omobitan (1995), which concentrated on the study of the trends, issues
and determinants of the balance of payments.
1.3 STATEMENT OF
THE PROBLEM
'The
monetary approach to the balance of payments has been related to the
asset market 'approach. This analysis changes in the balance of payments
position in terms of stock adjustments in the money market in which the supply
and demand for money balances are eventually willingly held.
Since
the global economic crisis of the 1980s, many developing countries like Nigeria
has been grappling with numerous economic problems. Such problems include
growing unemployment, unsustainable fiscal deficits, high inflationary
pressures, mounting debt burden, adverse balance of payments, under-utilization
of capacity and exchange rate misalignment. In Nigeria, the adverse balance of
payments which could be attributed to a number of factor (both internal and
external), reflect the deep-seated problems in the economy.
Amount
the external factors contributing to the deterioration in the Nigeria's balance
of payments are the economic recession experimented by most industrialized countries
following the oil price shocks of 1973/74 and 1972/80. The rapid increase in
the price of crude oil during this period made these industrialized countries
adopt various energy conserving policies as well as restrictive monetary and
fiscal policy measures which all the culminated the global economic recession
and consequently- resulted in the collapse of the world oil market in the early
I 980s. Other external factors include-the decline in capital flows,
deterioration in Nigeria's terms of trade and rising (but floating) rate.
interests in international capital and money markets, all of which worsened the
country's external debt burden,.
These
internal and external factors are however not mutually exclusive. They are in most
cases, interrelated and tend to reinforce one another. Most often, policies
needed to maintain external balance conflict within the required to restore
internal balance, thereby making the problem intractable. The huge external
debt burden and the dwindling foreign exchange reserves confronting most
development countries tend to constrain their efforts to respond adequately to
balance of payment shocks.
The
empirical test of the monetary approach to the balance of payment analysis on
the Nigerian economy which is the subject matter of this study shall provide
precise solution to the problem outline above.
1.4
RESEARCH
OBJECTIVES
The
broad objectives of this study is to
examine the relevance and applicability of the monetary approach to balance of
payments in Nigeria, with a view of determining the extent to which the
approach can serve as a useful framework for analyzing the balance of payments
problems in the country.
The
specific objectives of this study are:
1. To
test the propositions of the monetary approach to payments by way of analyzing
the data from Nigeria.
2. To
examine the impact of economic growth on the balance of payments' position in
Nigeria.
3. Determine
the nature and stability of money demand function, and the relevance of other
basic assumptions of the monetary approach to balance of payments determination
in the Nigerian context.
1.5 RESEARCH QUESTIONS
I.
Does monetary policy affect balance
of payments in Nigeria?
2.
What impact does economic growth has
on the balance of payments' position
in Nigeria?
3. The
determination of the nature and stability of money demand function have no
effect on the balance of payments determination in the Nigerian context.
1.6. RESEARCH· HYPOTHESIS
Ho:
That monetary policy does not affect
balance of payments in Nigeria
Ha:
That monetary policy affects balance of
payments in Nigeria
Ho: That
economic growth does not have any impact on the balance of payments' position
in Nigeria.
Ha: That
economic growth has impact on the balance of payments' position in Nigeria
Ho: The
determination of the nature and stability of money demand function have no
effect on the balance of payments determination in the Nigerian context.
Ha: The
determination of the nature and stability of money demand function have a great
effect on the balance of payments determination in the Nigerian context.
1.7 MODEL
SPECIFICATION
GDP
= F (ms, md, bop) under the hypothesis that
Ho = Bo = B1= B2=B3= 0
Ha
≠Bo≠B1 B2≠B3≠0
From
the above, the null hypothesis (Ho) states' that the values of the estimated
parameters are not significantly different from zero, while the alternative
hypothesis (Ha) states that the values of the estimated parameters are
significantly not equal to zero, which is our theoretical expectation.
ECONOMETRIC MODELSPECIFATION
This
study will use a multi-regression analysis to investigate that:
GDP
= Bo + B1MS + B2 BOP + B3MD + U
This
win be regressed following a list wise regression in the following ways
MODEL
1
GDP=Bo+B1MS+U
Where
GDP = Growth of the Gross Domestic Product
Bo = intercept or constant term of the
relationship
Bl=
coefficient of MS
The
model is to test the single impact of rate of growth of money supply on Gross
Domestic Product
Hypothesis
of the Model
Ho
= That monetary policy
does not affect balance of payments in Nigeria
Ha = That monetary policy
affects balance of payments in Nigeria
MODEL2
GDP
=Bo + B1MS + B2 BOP + U
Where
B2 = Coefficient
of BOP
The
model is to test the impact of money supply and balance of payments Gross
Domestic Product
Hypothesis
of the model
Ho = That economic growth does not have any
impact on the balance of payment in
Nigeria.
Ha = That economic growth have impact on the
balance of payments' position in
Nigeria.
MODEL
3
GDP=
Bo+BlMS+B2BOP+B3MD+U
Where
B3 = coefficient of Md
The
model is an improved fashion of (1 and 2) as it now involves money demand and
money supply.
Hypothesis
of the model
Ho = The
determination of the nature and stability of money demand function have no
effect on the balance of payments determination in the Nigerian context.
Ha = The
determination of the nature and stability of money demand function have a great
effect on the balance of payments determination in the Nigerian context.
1.8.
SIGNIFICANCE
OF THE STUDY
The
need for this study arises from the inability of the Nigerian economy at
experiencing a favourable balance of payment position for most parts of the
period since independence. Fundamental surpluses are only recorded in 1974· and
1990 in Nigeria 's balance of payments when N3, 102.2 billion and N 18? 498.2 million overall balances are
recorded respectively. For most of the other periods, surpluses have been
insignificant and for only few periods, deficits have been the order.
The
structural adjustment programmes embarked upon by most developing countries
including Nigeria, since the 1980s device their basic analytical framework
largely from the financial programming model of the International Monetary Fund
(IMF).Though the adjustment programmes are complex package of policy measures
aimed at a number of objectives including the attainment of a viable balance of
payments, satisfactory long-term growth
performance and low inflation (Khan, 1990: 95) the immediate objective of the
IMF's financial programming model is the attainment of a viable balance of
payment position. According to Khar, Monthel and Haque (1986), the model is
essentially a monetary model, built on the framework that links the financial
sector with the balance of payments.
From
the foregoing, it is evident that the theoretical basis of the -IMF's approach
to economic stabilization and adjustment is the monetary approach to balance of
payments which views external imbalance as emanating essentially from monetary
disequilibrium. This has accounted for the extensive use of the monetary
approach in analyzing, and designing economic policies for countries in balance
of payments trouble (Dornbusch and Fischer, 1990. 764). Thus, the need to
examine the theoretical basis and empirical relevance of the monetary approach
to balance of payments determination in the Nigerian context cannot be disputed
at this period of economic reform, programme in the proponents of the monetary
approach suggest that the effectiveness of various policy reform measure in the
place to address the balance of payments problems in the economy would depend
mainly on how their monetary implications are taken into consideration and on
the ability of the monetary authorities to control money supply and credit
creation.
1.9 SCOPEANDLIMITATIONOFTHESTUDY
The
study covers two distinct periods of exchange rate arrangement in post independence Nigeria. The first period (1960 - 198$)
covers the regime of -relatively fixed exchange rates, while.
the second period (1986 -1997) covers the regime of floating exchange rate. The
influence of the, determinants of money supply and money demand on the balance
of payments (as measured by external reserve flows) is examined in the first period,
while the influence of' the determinants of money supply and money demand on
exchange rate changes is examined in the second period.
Annual
data are used for the first period, while quarterly data are employed in the
second period because of the short period of flexible 'exchange rate system in
Nigeria (i.e, between 1986 - 1997).
The
major constraints of this study are the inaccurate data; the cost and time
requires carrying out this research.
1.10 METHOD OF DATA COLLECTION
This
study will make use of econometrics modeling coupled with an indepth descriptive
analysis of the relevant macro-economic . variables that have direct or
indirect. The necessary diagnostic 'and significant test will be conducted on
the estimated equations.
This
study will make use of secondary data and the main source of these data will be
from:
i.
The International Financial Statistics
Year Book of the International
Monetary
Fund (IMF) for several years.
ii.
Annual Reports and Statement of Accounts
for Central Bank of Nigeria
between
1960 and 1994.
iii.
The CBN Economic and Financial Review
for the periods 1970-1994.
iv.
The CBN Statistical
Bulletin-December 1994.
1.11. LITERATURE
REVIEW
The
monetary approach to balance of payments could be regarded as an extension of
the rudiments of monetary theory to the area of the balance of payments.
Three-main factors could be attributed to the renewed interest in the approach
in the post-world war II. The first factor was the re-birth of academic
interest in monetary problems as spearch headed by Milton Friedman and others
from the University of Chicago. The second factors emanated from the search by
the International Monetary Fund (IMF) for a monetary framework within which the
balance of payments policies could be evaluated.
The
monetary approach to balance of payments (MABP) has been a dominant view in.
the International Monetary Economics, particularly; the theory is believed to
have a long historical background, Which can be traced back to the writings of
the classical economists who conceived a system of integrated world capital
market and mobility? It is linked to the origin of balance of payments theory
in the work of David Hume, and more specifically, to this theory of
price-specie-flow mechanism (Johnson, 1976). While criticizing the objective of
mercantilism in accumulating precious metals, David Hume pointed out that the amount
of money in a country would be adjusted automatically to the demand for it. In
Hume's analysis, the process in which this adjustment takes place is through
surpluses and adjustment deficits in the balance of payments brought about by
changes in relative national money price levels. However, while drawing heavily
from Hume's theory of balance of payments, and this analysis of price-specie-flow
mechanism, the monetary approach places emphasis on monetary considerations in
the' interpretation of external balance problems rather than on changes in relative
national price levels (Dromhusch and Fischer, 1990, 764).
The
difficulties in applying the conventional elasticity/absorption approaches to
external balance on the developing economies prompted the search. Thirdly, it
was then the view that the monetary approach might provide a better 'framework
within which the balance of payments policies could be easily applied and
evaluated, given the reliance of majority of the developing economies on
monetary policies which operated in conjuction with relatively to the financial
markets.
1.12
ORGANISATION OF THE STUDY
In
chapter one, we have presented a general introduction -of this study. Also, the objectives, scope of the study as well as
the need for the study are also stated in this chapter.
In
chapter two, relevant literatures will be reviewed. Specifically, literatures
and empirical works directed at testing the monetary approach to the balance of
payments will be reviewed. The theoretical framework governing the monetary
theory of balance of payments analysis will be presented in chapter two as
well. The operations of monetary policies under various exchange rate regimes
will be discussed.
In
chapter three of this study over view of balance of payment in Nigeria. This
talk about the balance of payment related with Nigeria. The administration of
monetary approach coupled with the study of the trends issues and factor
affecting Nigeria's balance of payments will also be discussed in chapter
three.
Chapter
four will be centered on an empirical and descriptive analysis of relevant
data. The basic feature and assumptions as well as some of the existing
empirical finding on the monetary approach to balance of payments are reviewed, while the methodology, model
specification and estimation techniques as well as data description.
Finally,
in chapter five, we present a summary of findings of the study, on the basis of
which some policy conclusions are drawn. The limitations of the study and areas
for further study are also highlighted in this chapter.
1.13
CONTRIBUTION TO KNOWLEDGE
With
respect to the monetary approach to balance. of payment under a fixed exchange
rate regime, this .studies focused on the influence of changes or growth
indetermination of money demand as well as domestic component of money supply
in changes or growth in external reserves.
The
results of these studies in most cases support the propositions of the monetary
approach. For Instance, Courechence and Youssefs (1967) study of the relative
influence of imports and money supply on the demand foreign exchange reserves
for a group of nine countries (Switzerland, Netherlands, Denmark, Sweden,
Germany; Belgium, Italy, Japan and Australia) indicates that 'money supply is
superior to the level of imports in determining the level of foreign reserves.
Their empirical results indicate that money supply and long-term interest rate
are arguments in the demand function for individual country's foreign exchanges
reserves. From their study, Courchence and Youssef conclude that "the
application of the concepts of monetary theory to the field of international
payments can be very fruitful.
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