ABSTRACT
INTRODUCTION
The subject
matter of this project work has something to do with the Effectiveness of
Monetary Policy as an instrument of Economy Development.
It also entails
the various policies adopted in an economy to realize the economic development
for formulation and effective implementation of monetary policies.
The monetary
policy in Nigeria
is best – understood from the stance of the mandate set for the bank. Monetary
was viewed in a narrow perspective and influencing aggregates spending via the
regulation of interest rate, credit available and credit allocation.
The main
instrument that will be used for data collection in this research work are
personal observation, questionnaire and consultation of secondary materials.
This chapter of
the project will introduce the research in question. It will also give an
overview of the scope, purpose, significance of study, statement of problem,
limitation of study and the definition of major terms that will be used in the
study.
This chapter on
the other hand which is the literature review will give the overview of the
Effectiveness of monetary policy as an instrument of Economic Development. It
will also highlight the role of Central Bank of Nigeria (CBN) and appraisal of
its operation in influencing the various monetary policies.
It looks
critically into the main items of the project work that is the procedure for
collection and treatment of Research Question, sample and sampling techniques,
constraints to data collection.
This chapter of
the project is usually titled presentation and Analysis and interpretation of
data and results. Here, there will be a summary data analysed in the previous
chapters. Its comprises of interpretation of data and result of findings.
This is the last
chapter, which will include the deductions, recommendations and conclusion. It
will also offer a summary of the whole project, conclusion on the findings and
recommendation for further improvement on the effectiveness of the monetary
policies as an instrument of economic development.
TABLE OF CONTENT
Page
Title
Certification i
Dedication ii
Acknowledgement iii
Abstract v
Table of Content vii
CHAPTER ONE
1.0 Introduction 1
1.1 Statement
of the Problem 3
1.2 Purpose
of Study 4
1.3 Significance
of Study 5
1.4 Scope
of Study 6
1.5 Limitation
of Study 7
1.6 Definition
of Terms 7
CHAPTER TWO
2.0 Literature
Review 11
2.1 Overview
of Monetary Policy 11
2.2 Nigeria
Monetary Policy Experience 13
2.3 Monetary
Policy Before 1986 14
2.4 Monetary
Policy Since 1986 16
2.5 Objectives
of Monetary Policy 23
2.6 Ultimate
Target of Monetary Policy 23
2.7 Intermediate
Targets 25
2.8 The
Instrument of Monetary Policy 27
2.9 Direct
Instruments 28
2.10 Appraisal of Direct Instrument 29
2.11 Indirect Instrument 30
2.12 Appraisal of Indirect Approach 33
2.13 Other Instrument 34
2.14 Policy Measures 35
2.15 Monetary Policy Reform 37
2.16 Effectiveness of Monetary Policy 43
CHAPTER THREE
3.0 Research
Methodology 47
3.1 Introduction 47
3.2 Re-statement
of Research Question 47
3.3 Source
of Data Collection 48
3.3.1 The Primary Source 48
3.3.2 The Secondary Source 49
3.4 Administration
of Data Collection 49
3.5 Study
Population 49
3.6 Sampling
Technique and Determination of
Sample
Size 50
3.7 Constraints
of Data Collection 50
3.8 Data
Analysis 51
CHAPTER FOUR
Presentation, Analysis and
Interpretation of Data 52
CHAPTER FIVE
5.0 Summary,
Conclusion and Recommendation 75
5.1 Summary 75
5.2 Conclusion
76
5.3 Recommendation 77
Bibliography 79
CHAPTER ONE
1.0 INTRODUCTION
Economic
managements and development of nation depend on the information, manipulation
and implementation of the suitable economic policies.
The policies include
monetary, fiscal and external sector. The various policies do not work in
isolation but reinforce one another in realizing the economic development of
any nation. The development of any economic resolved round the formulation and
effective implementation of monetary policies.
The nature of
monetary policy remain district and ill until recently for two reasons.
Monetary was
reviewed in a narrow perspective and influencing aggregates spending via the
regulation of interest rate, credit availability and credit allocation view on
the role of money and monetary policies were dominated by the preventing
perception of the growth process itself and the modern growth theory has not
yet assigned a meaningful function to money.
The Central Bank
of Nigeria (CBN) has defined monetary policy as the combinations of
measured designed to regulate the value
supply and cost of money in an economy
in consonance with the level of economic activities.
The monetary
policy in Nigeria
is best understood from instance of the mandate set for the Bank. The core
mandate of the Central Bank of Nigeria
an spelt out in the Central Bank of Nigeria Act (1958), as amended (1997, 1998)
include:
-
Issurance of legal lender currency notes and
coins in Nigeria.
-
Maintenance of Nigeria’s external reserves to
safeguard the international value of the legal currency.
-
Promotion and maintenance of monetary stability
and a acting as bankers.
-
Acting as the lender of the last resort to the
banks.
Monetary Policy
is proposed by the CBN through a memorandum usually titled the “Monetary credit
Foreign Trade and Exchange Policy proposals” which is always meant for a
particular fiscal year. the memorandum is initially considered by the committee
of governments, the highest management body for day-to-day administration of
CBN. It is initially discussed, amended if necessary and approved by the board
of directors of the bank.
The proposals
are subsequently out to banks and other financial institution by the CBN in the
form of monetary policies circular for compliance, penalties for non-compliance
is also indicated in the circular.
In a nutshell,
the aims of monetary policy are basically to control inflation, maintain a
healthy balance a payment position in order to safeguard the external value of
the national currency and promote adequate and sustainable level of economic
growth and development.
1.1 STATEMENT
OF THE PROBLEMS
Monetary policy
is one of the major government policy measures in controlling and developing
the economy. The Central Bank of Nigeria was established to conduct
monetary policy, issue bank notes and supervise and regulate the country’s
financial system. Efficient conduct of monetary policy results in price
stability, which creates the enabling environment for economic growth, having
an autonomous monetary institution, allows for the separation of power to spend
money from the power to create money and this separation of the Central Bank of
Nigeria from the political process enables it to adopt the medium and long term
perspectives essential to conducting effective monetary and financial to
conducting effective monetary and financial sector policies. The objectives of
monetary policy have remained the attainment of internal and external balance.
However, emphasis have been made by the Central Bank of Nigeria by formulating
an annual monetary program that set targets for the growth rate of monetary
aggregates such as Broad money, Net foreign Asset, Domestic credit among
others. These targets are consistent with the rate of growth of the envisaged
for the economy that particular year.
The
effectiveness of this policy will be more visible if capital flows are
liberalized, open market operation (OMO) instrument is made more attractive and
the activities of the formal financial markets are understood.
1.2 PURPOSE
OF STUDY
The research
work investigates the transmission channel mechanism through which monetary
policy affect economic activities with particular focus on the Nigeria Economy
and how effective it has been to the Economy Development of Nigeria.
The
effectiveness of the Central Bank of Nigeria in executing its functions hinges
crucially on its ability to promote monetary stability: Price stability is
indispensable for money to perform its role of medium exchange, store of value,
standard of deferred payment and unit of account. Attainment of monetary
stability rest on a Central Bank’s ability to evolve effective monetary policy
and to implement it effectively.
Even though
there is no consensus on how monetary policy affect the economy, the
liquidation or interest rate, credit and exchange rate channel of monetary were
identified.
Moreso, an
in-depth knowledge of how the Central Bank of Nigeria adopted a medium term
monetary policy framework to free monetary policy implementation from the
problem of time inconsistency and minimize over-reaction due to temporary shock
is very vital improving the overall performance of the economy.
1.3 SIGNIFICANCE
OF THE STUDY
From the facts
above, this research is recommended relevant and useful for lectures, students,
policy makers, investors and financial organizations. This study will keep in
upstanding the effectiveness of monetary policy as an instrument for economic
development or nation building. Not this alone, it will also give an insight
into how the Central Bank of Nigeria alters the level of money in the economy
through indirect instruments such as the Required Reserves level, Minimum
Rediscount Rate (MRR), Open Market Operation (OMO), Treasury Bill sales in the
primary market, discount and rediscount operations and CBN certificates.
Through these monetary policy instruments, the bank influences the amount of currency
in circulation and interest rates, in such a way as to achieve monetary policy
objectives for the year.
1.4
SCOPE OF
THE STUDY
The research is
directed to the effectiveness of monetary policy as an instrument for economic
development. The study also looked at how the instrument to achieve the
objectives of monetary policy have changed over the years.
The two major
phases in the pursuit of monetary policy namely, before 1986 and since 1986.
The first phase placing emphasis on indirect monetary controls, while the
second relies on markets mechanisms.
This research is
also based on the financial statistics which is collated from the submitted
returns made by deposit money banks and which are put to rigorous test before
its adoption by the Central Bank of Nigeria. Also in the statutory data
produced by agencies like the federal office of statistics and federal ministry
of finance with the primary data collated by the Central Bank of Nigeria
through field survey and complied on the basis of tested theoretical frameworks
using various computations methodologies.
1.5
LIMITATION
OF THE STUDY
In all human
endeavours, problem are bound to arise, problem were encountered in the course
of conducting this study that is, which serves as limitation in the study.
The following
are some of them,
FINANCE
There are
limited fund to do detailed justice to the study, money especially in the area
of transportation.
CO-OPERATION
It was a bit
difficult for me to reach the necessary parties and as such to collect
necessary materials to be used.
1.6
DEFINITION
OF TERMS
Money supply: It refers to the total
value of money in the economy and this consist of currency (note and coins) and
deposit with the commercial and merchant banks. For the purpose of monetary
policy, there are two types of money supply in Nigeria M1 and M2
M1: This is the narrow measure of money supply
which includes currency in circulation with non-bank, public and demand deposit
(current account) at the commercial bank.
M2: This is the Board measure of money supply
and includes, M1 and saving and time deposits at the commercial and
merchant Bank.
Bank credit: Is a major determinant of
the supply and it embraces the amount of loans and advances given by the CBN,
commercial and merchant Banks to
economic agents, this is the banking system credit to the economy, which can be
broken down to government and private sector.
Other Asset (Net) – Is the orders of
assets of CBN commercial and merchant banks less their other liabilities.
Net Foreign Assets (NFA): This constitutes Foreign Exchange holding of
the CBN and commercial and merchant banks after netting out the claims of
foreigners.
Interest Rate: Is the price of money,
it is the opportunity cost of holding money and the return for parting with
liquidity.
Cost of capital: Is the cost incurred
in security funds or capital for productive purposes.
Reserve Requirement: It refers to the
proportion of total deposit liabilities which the commercial and merchant banks
are deposited to keep cash in vaults and deposits with the CBN.
Open Market Operations (OMO): It
involves the discretionary power of the CBN to purchase or sell securities in
the financial market in order to influence the volume of liquidity and the level
of interest rate which ultimately will affect the money supplied.
Fiscal multiplies: This refers to the
excess of expenditures over revenue of the government.
Money multipliers: Is the factor that
relates base money currency outside banks and bank reserves with money supply.
Treasury security: Is money market
instrument created by government for financing short time fiscal operations.
Total Reserves: The sum of required
reserve and excess reserves.
Vault cash: Commercial and
merchant Banks keep petty cash in their
vault for emergency transaction before they can access their accounts with the
CBN.
Discount House: Is a financial
institution that trade in government securities both at the primary and
secondary segments of the money markets in treasury Bills and certificates and
other eligible public and private sector instrument.
The Bid rate: Is the interest rate
submitted by dealers at which they can buy the securities.
Yield: Is the expected return on
securities after taking into consideration to the purchase and sale prices and
the stream of dividends or interest payment expected during the period.
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