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The Impact
Of Monetary Policy On Economic Growth In Nigeria
ABSTRACT
This study
examined the impact of monetary policy on economic growth in Nigeria from
1979-2008. The study adopted error correction model specification. Data was
collected from CBN statistic bulletine, the statistical techniques with the aid
of P.C. give software package. The finding from the study support the view that
monetary variables used has no significant impact on economic growth in Nigeria
The study
recommend autonomy of the monetary authority (CBN) to avoid bias in policy
formation and implementation due to political expendency. The monetary policy
should focus and manage these two elements monetary: the desired autonomy of
the monetary policy, the degree of openness of capital.
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND OF THE STUDY
Monetary
policy in Nigeria has been conducted under wide ranging economic environment
since the establishment of the central bank of Nigeria (CBN) over forty years
ago. However, in recent years, the federal, government has made conscious and
determined efforts to set and attain a high standard of macro-economic
variables in order to highlight -the impact of monetary policy on economic
growth in Nigeria however, due to present challenging conceptual and technical
problems these efforts have not shown their full weight on the position of the
economy.
In essence
right from the formulative years achieving aggregate economic potentials, the
main objectives of the monetary policy were healthy balance of payment position
as well as the acceleration of the price of economic development and full
employment.
The Nigeria
economy experience serious economic problems from late 1970 are to mid 1980’s.
The country’s balance of payment came under severe pressure and was in
persistent difficult during the period. The government current expenditure
expanded without appreciable increase in revenue leading to widening fiscal
deficit, which were largely financed with bank credit with adverse consequences
on the general price level.
Generally,
monetary control depends on the use of direct monetary instruments such as bank
rate, open market operation changes in reserve ration and selective credit
control.
The usually
targets of monetary policy are money supply, availability of credit and
interest rates. The major objectives of monetary policy are full employment,
price stability (which also includes controlling fluctuations), economic growth
and maintaining balance of payment equilibrium.
The uses of
market based instruments such as the open market operation (omo) were not
feasible because of extreme narrowness and under development nature of the
financial market.
Between
April 1992 and March 1976, the use of an aggregate credit ceiling was dropped
for specifications on several distribution of bank credit. Throughout the
period they also served quite effectively as instruments of monetary control.
The
situation was particularly serious between 1982 and 1985 when stringent
economic controls were not effectively used in arresting the deteriorating
situation. Inevitable a period of economic adjustment has to come with the
introduction of the structural adjustment programme in July 1986. the overall
aim of the economic adjustment process embarked upon by the federal government
in July 1986 was to restructure – the
federal production and consumption pattern of the economy through the
elimination of price distortion and reducing of the over dependence of the
economy on the export of crude oil and impart the raw materials and consumer
goods. According to the monetary policy measures adopted under the programme
ere designed on inflationary pressure and restricted the demand for available
foreign exchange resources.
In the
process of monetary management policy formulation is of utmost importance to
specify the focus of the policy, otherwise it will be impossible to evaluate
performance for example the objective of price stability and growth are
infrequent conflict inflationary policies may enhance the rate of growth in the
shortrun which may be sustainable in the longrun. Monetary expansions may raise
output of goods and services and level of employment and consequently lead to
price stability in the longrun.
In Nigeria
the CBN wielded the primary responsibilities of initiating, implanting
articulating and appraising a monetary policy, the result level of, macro
economic instability in Nigeria is as a result of the sustained pursuit of
expansionary fiscal and monetary policies coupled with inadequate response of
output.
There have
been some record of success and failures in the role of those policies are
shown by empirical result of their performance. a good examination of monetary
policy in Nigeria’s case shows that a better result will be attain if independence
is being granted to the people concern in the implementation of such policies.
1.1 STATEMENT OF THE PROBLEM
Monetary
policy encompasses actions of the central bank, such actions are to ensure that
the expansion of money and credit will be adequate for the longrum needs of the
economy at stable prices. Monetary policy is not only the macro-economic
instrument or tool. In Nigeriathe effectiveness of monetary policy has in fact
depends crucially on the stance of fiscal policy exchange rate has also exerted
an important influence on the economy, particularly from the supply side.
According to
Anyanwu (1993:53) monetary policy is major economic stabilization weapon which
involves measures designed to regulate and control the volume, cost, availability
and direction of money and credit in an economy to achievement macro economic
objectives or goals. The problem lies on making use of policy that will solve
the economic problems instead of the economy to have low level of investment,
income and also the level of demand supply will reduces. Another problem is how
to restructure the production and consumption pattern of the economy through
the elimination of price distortion.
Another problem is the power response of the
financial system to monetary policies control measures which has to do with
lack of transparency in the operation of financial intermediaries.
1. 2 OBJECTIVES OF THE STUDY
The main
objective of this study is to asses the effectiveness of the monetary policies
in Nigeria. However the following specific objectives would also be achieved.
i. To examine the trend and
structure of monetary policy in Nigeria.
ii. To empirical investigate the impact of
the monetary policy on economic growth in Nigeria
iii.
Evaluate the performance of monetary policy in Nigeria over the years under
study
1.3 RESEARCH HYPOTHESIS
The
hypothesis is to be testes in the course of this research work are.
Ho -
the monetary policy instruments do not have significant impact on the economic
growth in Nigeria.
1.4 SCOPE OF THE STUDY
The economy
is a large component with lots of diverse and sometimes complex growth
components such as the gross domestic product, price level, exchange rate and
balance of payment equilibrium. The study will cover all the facets that make
up the monetary policy, but shall empirically investigate the effect of the
major ones. The empirical investigation of the impact of the monetary policy on
macro-economic variables in Nigeria shall be restricted to the period between
1979-2008. The study would also examine the monetary policy regimes that have been
adopted in Nigeria since 1960to date as well as evaluate its performance.
1. 5 LIMITATION OF THE STUDY
It is
impossible to conduct an examination or trace the entire role played by the
monetary policy since the establishment of central bank in 1959.
Some changes
took place when monetary policy was largely based on direct control and during
the structural reform in 1986 some changes also took place.
This is
occasioned by the time and finance necessary to embark on data collection and
analysis.
1.6 SIGNIFICANCE OF THE STUDY
The
importance of this is because it will be over emphasized. This is because it
will be meaningful and useful to the general public and stake holders when
formulating and implementing monetary policy should be a collaborative endevour
between the central bank of Nigeria and all informed stakeholders, through the
responsibility to initiate this policy is on the former.
This study
will also state the importance of monetary policy, which are as follows:
i. Monetary policy ensures efficient
and effective control of the money in the economics.
ii. Monetary policy ensures that
achievement of desired national objectives.
iii. It influences the direction of
economic progress in the country.
This project will also be useful to other
researches that are writing on a similar topic or making research to acquire
knowledge.
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