Impact of Monetary Policy on Economic Growth in Nigeria

The Impact Of Monetary Policy On Economic Growth In Nigeria investigates the role monetary policy variable in stabilizing the economy of Nigeria. Its impact specifically on stable economic growth. Read and enjoy.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The issue of the persistence low level of economic development in Nigeria has been a matter of concern to economists and policy makers. It has been argued that this is the outcome of capital shortage. It has also been contended that the fragmented state of domestic resource mobilization and the resultant inefficient intermediation between savings and investment are key bottlenecks to self-sustainable development in Nigeria (Akyuz, 1993). Capital shortage portends the need to mobilize greater domestic resources if sustainable economic development is to be promoted. However, mobilizing domestic resources via savings and then, channelling the savings into productive investment can hardly be done without the existence of a sound monetary policy capable of directing the resources into major productive investment (Soyibo, 1997)

Popularly, monetary policy refers to combination of measures designed to regulate the values, supply and cost of money in an economy in consonance with the level of economic activity (Folawewo and Osinubi, 2006). Monetary policy refers to the credit control measure adopted by the central bank of a country. Monetary policy according to Olumechere (2002) is a deliberate effort by the monetary authorities to control supply and credit conditions for the purpose of achieving certain broad economic goals.

Still on ,,,,,, Impact Of Monetary Policy On Economic Growth In Nigeria investigates.

Johnson (2001) defines monetary policy as policy employed by central bank to control the supply of money as an instrument for achieving the objectives of macroeconomic goals. According to Salvin (1999) monetary policy is the use of open market operations, change in discount rate, change in reserve requirement and other measures available to the monetary authorities to control the rate of growth of money supply. He further noted that the goals of monetary policy are price stability, relative full employment and satisfactory rate of economic growth.

Akatu (1993) noted, monetary policy in the Nigeria context encompasses actions of the central bank of Nigeria that affect the availability and cost of commercial and merchant bank reserve balances and thereby the overall monetary and credit condition in the economy. The main objective of such action is to ensure that over time, the long-run needs of the growing economy at stable prices. The aim of monetary policy are basically to control the inflation, maintain a healthy balance of payment positions for the country in order to safeguard the external value of the national currency and promote an adequate and sustainable level of economic growth and development. The formulation is done by the federal government, mostly announced during budget speeches while the enforcement of the policy is solely the responsibility of the central bank of Nigeria (CBN).

Still on ,,,,,, Impact Of Monetary Policy On Economic Growth In Nigeria investigates.

Economic growth on the order hand, according to Kindleberger (2000) means more output, while Friedruan (2003) defines economic growth as an expansion of the system in one or more dimensions without a change in its structure, and development as an innovative process leading to the structural transformation of social system.

Thus economic growth is related to a quantitative sustained increase in the countries per capita output or income accompanied by expansion in its labour force, consumption, capital and volume of trade. An economy on the other hand can be said to be developed when there is a quantitative and qualitative increase in the amount and quality of goods and services produced in the country. In its widest aspect economic growth and development implies raising the standard of living of the people and reducing inequalities in income distribution.

Still on ,,,,,, Impact Of Monetary Policy On Economic Growth In Nigeria investigates.

According to Todaro & Smith (2011) development is the process of improving the quality of all human lives and capabilities by raising people’s levels of living, self-esteem, and freedom. 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 authorities involves the expansion or 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.

Between April 1992 and March 1996, the use of an aggregate credit ceiling was dropped for specification 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. In-evitable a period of economic adjustment has to come with the introduction of the structural adjustment programme in July 1986. The overall aim of the structural adjustment programme embarked upon by the federal government in July 1986 was to restructure the production and consumption pattern of the economy, the elimination of price distortion, and reduction of the over dependence of the economy on the export of crude oil and import of raw materials and consumer goods. In the course of this project, detailed attention will be paid to the impact of monetary policy on economic growth in the period of 1981-2013.

1.2       Statement of the Problem

Annually, the monetary authority comes up with guidelines geared towards the enhancement and development of policy variable designed to ensure desirable performance of the banking industry and most importantly to advise the macroeconomic goals or objectives but in the implementation of such policy variable certain conflicting issues are to be addressed ranging from the ability to comply with various monetary policy guide as well as satisfying depositors and shareholders. In fact, commercial banks are reluctant in their responsibility to comply with the rules and regulations set by the central bank such as the open market operation (OMO), required reserve ratio (RRR), bank rate, liquidity ratio, selective credit control and moral suasion. These are the instruments of central bank in controlling the activities and operations of commercial banks in other to achieve the macroeconomic objective such as growth, price stability balance of payment equilibrium, full employment.

The central bank of Nigeria (CBN) guidelines helped in setting of the interest rates charged by the commercial banks, sales or purchases of securities to control the money supply, and changes in the required reserve ratios of banks and other financial institutions. The guidelines affected by other interest are both through open market operations to affect the probability that the banks are going to need to borrow at its own lending rate, and by the announcement effects of changes in the central bank’s minimum lending rate, which are regarded by the markets as statement about the authorities forecasts and objectives. The CBN guideline on monetary policy works through the effect of the cost and availability of loans to real activity, and through this on inflation, and on international capital movement and thus on exchange rate.

Still on ,,,,,, Impact Of Monetary Policy On Economic Growth In Nigeria investigates.

Central Bank of Nigeria and the federal government’s formulation and implementation of the monetary policy more or less finds its ultimate translation to the economy in real terms.

The main thrust of this study is to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go a long way in assessing the extent to which the monetary policies have impacted on the growth process of Nigeria using the major objectives of monetary policy as a yardstick.

1.3      Research Question      

In the course of this research the following question will be addressed;

  • To what extent does monetary policy impact on the economic growth in Nigeria?
  • Is there any long-run relationship between monetary policy and economic growth in Nigeria?
  • Is there any significant causal relationship between monetary policy and economic growth in Nigeria?

1.4       Objective of the Study                 

The main objective of the study is to assess the impact of changing monetary policy in Nigeria and its role in returning the economy back to equilibrium after an inflationary imbalance.

The specific objectives of this study are to:

  • empirically investigate the impact of monetary policy on economic growth in Nigeria.
  • evaluate the long-run relationship between monetary policy and economic growth in Nigeria.
  • examine if there is any causal relationship between monetary policy and economic growth in Nigeria.

Still on ,,,,,, Impact Of Monetary Policy On Economic Growth In Nigeria investigates.

1.5       Research Hypotheses

The hypotheses to be tested in the course of this research work are:

H0: That monetary policy does not have significant impact on economic growth in Nigeria.

H0: That monetary policy does not have significant long-run relationship with economic growth                in Nigeria.

H0: That monetary policy does not have causal effect on economic growth in Nigeria.       

1.6       Significance of the Study

Nowadays, most African scholars and policymakers increasingly subscribe to a conventional view of central banking. That view prioritizes the objective of monetary policy much more strongly than did either theoretical orthodoxy or African central banks themselves in the 1960s and 70s.The time consistency literature, in particular, argues that the central bank fails to specialize in monetary stability, making low inflation a clearly overriding priority as against output stability, fiscal support to the government , or a competitive real exchanges rate, ending up with no offsetting gains in economic performance. There is little room for African Central Banks to play active development role; rather, long-run growth is promoted through the maintenance of low inflation, which increases investment and growth by reducing macroeconomic uncertainty.

This study is significance in the following ways;

Scholars: Scholars will benefit from this study as it would provide an objective view of the effectiveness of the monetary policy in Nigeria and also serve as a basis for further research.

Monetary Authority: The study would also provide an econometric basis upon which to examine the effect of monetary policy on the Nigerian economy.

Government: Lastly, it would provide policy recommendations to law-makers on ways to make Nigerian economy vibrant through the monetary policy.

1.7       Scope and Limitation of the Study

The economy is a large component with lot of diverse and sometimes complex parts. This study will only focus on the major growth components such as gross domestic product etc. Also the study will cover the entire facet that make up the monetary policy, but shall empirically investigate the impact of major ones. This shall be restricted to the period between 1981 and 2013.

The major limitation of the study is that the researcher was financially independent as a student, the need for material trips and logistics needed for this research was not adequately provided and finally, time constraint as there was not enough time to carry this research work as he combines same with academic work.

If you need other project click on Project materials.

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