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Evaluation
Of The Impact Of Monetary Policy On Economic Growth And Inflation In Nigeria
ABSTRACT
Generally,
monetary policies seek to achieve relative macroeconomic stability. Based on
countries’ experience especially that of Nigeria on the role of monetary policy
in controlling economic stability, this study examines the efficacy of monetary
policy in controlling inflation rate and output fluctuation and taking into
cognizance the evaluation and framework of monetary policy in Nigeria. Using annual data spanning over 1985-2008 and
applying the Ordinary Least Square (OLS) technique on the data used, the paper
shows that the effort of monetary policy in influencing the finance of
government fiscal deficit through the determination of inflation-tax rate
affects both the rate of inflation and real output, thereby causing volatility
in their rates. The result data analysis shows that there is a positive
relationship between the real gross domestic product, exchange rate and money
supply but a negative relationship exists between real gross domestic product
and interest rate. The policy import of the paper is that monetary policy
should be set in such a way that the objective is to be achieved well defined.
CHAPTER ONE
INTRODUCTION
1.1. BRIEF OVERVIEW OF THE STUDY.
Monetary policy as defined by
Anyanwu (1993) involves measures designed to control the volume, cost,
availability and direction of money and credit in an economy to achieve some
specified macroeconomic policy objectives. It also refers to the policy of
monetary authority of a country with regard to monetary matters. It may be
defined as the policy that deals with;
(a) The control of financial
institutions
(b) Active purchases and sales of
paper asset by the monetary authority as a deliberate effort/attempts to effect
changes in the money conditions and
(c) Maintenance of particular
interest rate structure, the stability of security prices or meeting other
obligations and commitments.
Monetary
policy is one of the macroeconomic policies available for managing the economy.
It is however important today because of its effects on such macroeconomic
aggregate as price, output, interest rates and exchange rates.
In most
countries, the central bank is saddled with the responsibility of conducting
monetary policy. In the case of Nigeria, the responsibility entirely lies with
the Central Bank of Nigeria (CBN) .The discretionary control of money stock by
the monetary authority involves the expansion/contraction of money, influencing
interest rate to make money cheaper or more expensive, depending on the
prevailing economic situation.
The
evaluation of monetary policy intends to show how this macroeconomic policy is
formulated and executed in practice particularly in an environment of federal
government fiscal dominance and highly liquid banks.
However,
there is need to point out that the Central Bank of Nigeria (CBN) adopted a
medium term framework for the conduct of monetary policy. In the words of CBN,
say “in recognition of the fact that monetary policy impacts on the ultimate
objectives with substantial lag”. Furthermore, the shift was designed to free
monetary policy from the problem of time inconsistency and overreaction owing
to temporary shocks.
The annual
reports of the Central Bank of Nigeria (CBN) and monetary policy circulars that
it issues to the commercial banks form the basis for a quantitative assessment
changes in monetary policies. With regard to the monetary circulars, the
content changes from one year to another depending on the objective pursued by
the central bank.
This study
will enable us to understand what the framework of monetary policy in Nigeria
looks like. It will further throw more light on its evaluation in the Nigerian
economy. Data relating to necessary variables in the research work will be
sound from the Nigerian economy.
1.2 STATEMENT OF THE PROBLEM
The monetary
policy implemented in the economy over the past years has been detrimental to
and inconsistent with the developmental needs of the economy (Apata. J.T 2007).
This concern has exerted pressures on the national monetary authorities in
Nigeria to re-examine and re-evaluate their domestic monetary policies with the
view of finding possible solutions. As a result of this, the Structural
adjustment programme was introduced in Nigeria in 1986 in order to correct
structural imbalances in the economy and to liberalize the financial system.
There is an
agreement that monetary and fiscal policies jointly and individually affect the
level economic activities on which the policies focus. The degree and relative
superiority of one instrument over the other in achieving these objectives has
been the subject of debate and controversy among economists and policy makers
and tentative resolutions are attempted empirically for different countries and
different periods and circumstances.
In ensuring
optimal expansion in liquidity for meeting desired growth and balance of
payment objectives and at the same time achieve economic stability, monetary
policy should be complemented with and coordinated fiscal policy but past
studies have revealed that the effectiveness of monetary policy was hindered by
the pursuit of expansionary fiscal policy. Due to this, the outcome of monetary
policy was affected by administrative controls which involved the fixing of
basic prices such as interest rate and exchange rate at below market level.
Despite
various actions used by the monetary authorities in administering monetary
policy in Nigeria, there are still limits to the effectiveness of monetary
policy. There has been a wide discrepancy between target and outcome due to the
fact that the central bank has not been able to achieve the various objectives
it set out for itself. For instance, the target for M1 (money supply) was fixed
at 10.2 percent in 1998 but M1 rose by 20 percent that year. In 2001, M1 target
growth rate was 4.3percent but rose by 28.1 percent. The same pattern of
failure is observed for M2 (broad money) series. There has been a problem also
hitting the inflation target. For example, the target for inflation in 2007 was
7 percent but the performance was about 19 percent.
What a
developing economy like Nigeria needs an effective, efficient, sound, and
consistent monetary policies that have a positive impact on interest rate,
inflation rate, employment and real output. Instead, these policies have led to
price instability thereby causing inflation, high interest rate and
unemployment in the economy.
Therefore,
this research work is set to examine the monetary policy framework and also to
see how monetary processes. And (if possible) suggest ways (from the wealth of
experience of renowned economist in their write ups both in Nigeria and abroad)
to solve the problem of ineffectiveness and inconsistencies in the evaluation
of monetary policy in Nigeria
1.3 OBJECTIVE OF THE STUDY.
The main
objective of the study is to examine the framework and the evaluation of the
monetary policy in Nigeria. However, the general overview of the monetary
policy in Nigeria will be looked into. Likewise the tool of monetary policy
will be extensively evaluated.
The specific
objectives of this study are:
1. To examine the various monetary policy
instruments used in Nigeria.
2. To estimate the effects of various
monetary policy instruments on the economic growth in Nigeria.
3. To estimate the effects of the various
monetary policy instruments on inflation rate in Nigeria.
1.4 RESEARCH HYPOTHESIS.
To
effectively achieve the above mentioned objectives, the researcher adopts a
null hypothesis.
H0: There are no monetary policy
variables/instruments in Nigeria
H0: Monetary policy instruments do not affect
economic growth in Nigeria.
H0: Monetary policy instruments do not affect
inflation rate in Nigeria.
1.5 JUSTIFICATION OF THE STUDY.
Establishing
a monetary policy framework that follows and builds on recent historical
experience around the world would greatly improve economic stability and growth
in Nigeria.
Past studies
have revealed that there are limits to the effectiveness of the monetary policy
in Nigeria. From the mid-1970s, to achieve the aims of monetary policy became
increasingly difficult. The major source of problem in monetary management was
the nature of the monetary control framework interest rate regime and the non
harmonization of fiscal and monetary policies. The monetary control measures
which relies heavily on credit ceiling and selective credit controls,
increasingly failed to achieve the set monetary targets as their implementation
became less effective with time.
Overtime,
the Central Bank of Nigeria has recognized that achieving stable prices would
require continuous reassessment and evaluation of its monetary policy
implementation framework to enable it respond to the ever-changing economic and
financial environment.
This study
is however important because its findings will reveal extensively how monetary
policy in Nigeria has been carried out. This research study will be relevant
due to the fact that it is expected to demonstrate how monetary policy can be
effectively used in financing other sector in the Nigerian economy.
It will also
help the monetary authorities to understand and know how best to direct
monetary policy instruments in order to achieve macroeconomic goals of the
government. It will likewise aid the public’s understanding of striking a
balance in the trade-off in monetary goals such as full employment and growth
and price stability among others.
1.6
SCOPE OF THE STUDY.
This
research work will entail a survey of monetary policy in Nigeria. It will take
into consideration the various tools of monetary policy and its evaluation and
review the relevant literature on monetary policy. The research work in
addition will look briefly at the limitations. This study seeks to cover a period
of 23 years, 1985-2008.
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