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AN
ECONOMETRIC ANALYSIS OF THE EFFECTS OF MONETARY POLICY ON NIGERIAN ECONOMY
ABSTRACT
This study
aimed at analyzing through econometric methodology the effects of monetary
policy in Nigeria economy. To meet the above objective, output growth was
chosen as the dependent variable while real exchange rate, real interest rate
and inflation was chosen as the independent variable. The ordinary least square
was used in the regression estimation. From the empirical result, we realized
that the entire explanatory variables are insignificant in the t-test, but in
f-test we rejected the null hypothesis and conclude that the slope coefficient
are not simultaneously equal to zero. We realizes from the battery test that
there is a co integration between the explanatory band the dependent variables
since its level of stationarity are the same.
The policy
implication of the result is that if monetary and banking policies are
effectively applied, it will be consistent with determining the level of output
growth in the economy
CHAPTER ONE
1.0 INTRODUCTION
One of the
ways taken by all economy to make the banking sector effective is the use of
the monetary policy introduced by the federal government and carried out by the
apex bank of the country. Apparently, the existence of an effective banking industry is vital to
every economy and it encourages economic growth and development via its role in
financial interdiction of funds supplies to deficit economic units .This
stimulates international trade, investment economic growth as well employment
growth as well as employment.
Monetary
policy is one of the steps taken by every economy to make the banking sector
effective. Monetary and banking policies are the sole responsibilities of
monetary authority, which comprises of The CBN for the initiation,
implementation and articulation of monetary system. The CBN carried out these
duties on behalf of the federal government according to CBN decree 21 of 1991
and the banks and other financial institution BOFIA A4, of 1991 as amended. The
banks proposal on monetary policy is subjective to the federal government.
The policies
to be pursued is usually out in form of ‘’Audience’’ to all banks and other
financial institutions. The guideline are general in operation within a fiscal
year but could be amended on the course of the year. The CBN is equally
empowered to direct the activities of the financial institutions in other to
carry out certain duties in pursuit of approved monetary policy of which
penalties are prescribed for non-compliance with specific provision of the
guidelines.
1.1 BACKGROUND OF THE STUDY
Monetary policy affects financial and
economic activities over the year. In other to appreciate the effects of
monetary policy on the banking industry, it would be wise to move a review of
changing views of monetary influence. Usually when the quantity of money
changes in relation to financial activities as viewed by FISHER (1932). Fisher,
take other neoclassical writer who held the view that in short run, money
influences real cash balances. According to him, when the money stock
increases, example;
An increase commodity prices since
output and velocity were fixes initially. He assumed that a rise in commodity
prices would exceed the increase in interest rate which was regarded as a
component of a firms operating cost. In the whole analysis, rise in commodity
prices will lead to an increase in a firms profit, demand, money stock and
deposit which will eventually lead to a further rise in investment and
commodity price. The excess reserved for lending will decline with interest
rate, which was stocky earlier.
In the analysis of long-term
transmission of monetary influence, Fisher replaced ‘’Interest-Investment’’
channel with ‘’Real Cash Balance’’. He noted that when wealth rises due to rise
in money stock, people tend to reduce their cash balances by purchasing goods
and service. Since the velocity (v) and output (y) in Fishers equation of
exchange (MVPT) is fixed, the risen money stock (M) cannot lead to increased
holding of goods and services but will lead to decline in prices level (P).
Keynes (1936) accepted the change in money supply relative has both
substitution and effect and considered investment to be quite responsive to
interest rates.
Keynes recommended price induce wealth
effects, (i.e. change in wealth due to change in yields). There are ranging
accounts by his interpreters about the extent he integrate them in his general
theory. Hence subsequent write to Keynes (i.e. Keynesian or post Keynesian
regards the cost of capital (interest rate) as the main process by which
changes in money stock influence the economy. Thus the change in volume of
money alters the rate of interest. Usually approximated by the long-term
government bound rate, which affects investment and consumption. Thus the link
between wealth of private sector and real sectors and consumption was analyzed
by Piguo (1974) and Patikin (1951) in form of ‘’real cash balance effect’’
According to them changes in quantities of money would affect aggregate demand
even if they did not alter interest rate. On the other hand, credit rationing
channel of monetary influence explained
how financial interdiction, would be controlled by the market forces so
as to ration the supply of credit by non-price mechanism.
Thus an
expansionary monetary policy would raise the force of equity (i.e. reduce the
yield on equities). The margin between the market evaluation and cost of
reproducing the existing capital goods will stimulate new investment over those
goods. The non-monetarist argued that
monetary policy is as effective as fiscal policy as to determine total spending
in the economy in spite of their differences. It holds the following views:
1. Movement in quantity of money is the most
reliable measure of monetary value.
2. Monetary authority can detect the movement
in the stock of money over time and business cycle.
3. Changes in stock of money are the primary
determination of total spending as emphasized on owen’s economic stabilization program.
4. Monetary impulse are transmitted to real
economy through an active price process or profit adjustment process which
affect many financial and real antes.
1.2 STATEMENT OF PROBLEM
Despite the
establishment of Central Bank of Nigeria (CBN) in 1958, banking industry
remained both poor, inadequate in terms of number, quality and variety of
service rendered. The establishment of CBN paved way for adoption of monetary
management by the banking industry. Just incase any analyst is waiting in the
wings to strike CBN for its poor monetary policy performance. Ogwuma (1994:362)
offers a defense which says “A less than objective appraisal of the CBN role in
the Nigerian economy could interpret the adverse macro-economic trend as
evidence of failure on the part of CBN. The key constraint are as follows:
1.3 AIMS AND OBJECTIVES OF THE STUDY
The
following issues are the main aims and objectives of carrying out this study;
a. To identify the basic effects of
monetary policy in order to
Achieve a
sound financial system.
b. To examine CBN monetary policy strategies
c. To identify the best policy measure for
economic stability.
1.4 SIGNIFICANT OF THE STUDY
The
important of this study cannot be over emphasizes. It will serve as a useful
material to the monetary authority, bank management and staff, customers,
depositors, students and indeed the entire economy. Never the less, it will add
to the volume of studies on the regards. The report shall be useful in ensuring
both monetary stability and a sound, safe and profitable banking environment
which will facilitate the pace for the economic growth and development in
Nigeria.
1.4 HYPOTHESIS / RESEARCH QUESTION
The
following hypothesis has been formulated as a guide to the conduct of the
study. They should be tested based on the result obtained from the regression
coordinated. The hypotheses are;
b. Ho: Variation in monetary policy
does not significantly
affect
output growth.
c. H1: Variation in monetary policy
significantly affect output
growth
i.e. Ho= Null Hypothesis
Hi= Alternative Hypothesis
1.5 SCOPE OF THE STUDY
Although
there exist many factors affecting the operation of or the performance of the
banking industry, this study focuses on the impacts of monetary policy on the
performance of the banking industry.
1.6 LIMITATION OF THE STUDY
It is quite
believed that the study of nature needs sufficient time, finance and materials.
The inadequacy of those factors poses enough limitations to this study. The
limitations in general include;
a. Financial and monetary constraint
b. Material constraint
c. Time constraint
d. Physical and Geographical constraint
1.8 DEFINITION OF TERMS
1.8.1 BANKING INDUSTRY
These refers
to the total number of banks and other financial institution who performs
banking function such as acceptance of deposits,. Issuing of credits/loan and
keeping of valuables. Such banks include; Merchant Banks and Development Banks
etc. The banking industry also consists of the monetary authorities such as Central Bank of Nigeria and other federal bodies whose duty
includes the regulation of the economy.
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