AN EMPIRICAL ANALYSIS OF THE IMPACT OF MONETARY POLICY ON ECONOMIC DEVELOPMENT IN NIGERIA (1985–2011)

AN EMPIRICAL ANALYSIS OF THE IMPACT OF MONETARY POLICY ON ECONOMIC DEVELOPMENT IN NIGERIA
(1985–2011)

ABSTRACT

One can hardly find a country without monetary policy. As a matter of fact, monetary policy has gained a solid ground in the Nigerian economy. However, in light of various economic problems in Nigeria, it would seem the benefits of monetary policy are yet to be fully harnessed. The purposed of this study is to analyse the impact of monetary policy with Nigeria being the case study. With regards to the data analysis, regression analysis was applied. The study covers the effectiveness of monetary policy from the period 1985 to 2011. The study revealed that the level of effectiveness of monetary policy is highly influenced by the Central Bank of Nigeria (CBN).

 CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND OF THE STUDY

One of the major issues which have occupied the mind of government for years is the impact of monetary policy as a tool for price stability in Nigeria. Despite the lack consensus amongst the economy, there is remarkable strong agreement that monetary policy as an economy-stabilizing measure in Nigeria refers to the persistence rise in the general price level.

Monetary policy is one of the macroeconomic policies available for managing the economy. It is however important today because its effects on economic aggregates such 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 the money stock by the monetary authority involves the expansion and contraction of money, influencing interest rate to make money cheaper or more expensive depending on the prevailing economic situation.

 1.2 STATEMENT OF THE PROBLEM

The monetary policies implemented in the economy over the past years has been detrimental and inconsistent with developmental needs of the economy (Apata J.T, 2007). This concern has exerted pressures on the monetary authorities in Nigeria to re-examine and re-evaluate their monetary policies with the view of finding possible solutions. As a result of this, the Structural Adjustment Programme (SAP) as introduced in Nigeria in 1986 in order to correct the structural imbalances in the economy and to liberalize the financial system.

Despite various actions used by the monetary authorities in administering monetary policies 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, there has been a problem hitting inflation target. The inflation target in 2008 was 7% but the performance was about 19%.

Nigeria needs an effective, efficient, sound and consistent monetary policies that has a positive effect on interest rate, employment and real output, so as to minimize the economic problems disturbing Nigeria as a developing country

1.3 RESEARCH QUESTIONS

What is the effect of monetary policy on price stability in Nigeria?

To what extent do the instruments of monetary policy control inflation in Nigeria?

What are the contributions of monetary policy towards developing Nigeria?

1.4 OBJECTIVES OF THE STUDY

This study seeks to achieve the following objectives;
I. To determine the impact of monetary policy on inflation in Nigeria.
II. To empirically examine the effectiveness of monetary policy on economic stability in Nigeria.
III. To analyze the contributions of monetary policy towards promoting growth and development of the Nigerian economy.

1.5 RESEARCH HYPOTHESIS

The hypothesis to be tested in the course of this research work is stated below;
H1 = Monetary policies has significant impact on inflation in Nigeria.
H2 = Monetary policies has no significant impact on inflation in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study is significant in the following ways;
I. It would provide an objective view of the effectiveness of the monetary policies in Nigeria.
II. It would provide an economic basis upon which to examine the effect of monetary policies on the Nigerian economy.
III. It would provide policy recommendations to the policies makers on ways to make the Nigeria economy vibrant through the monetary policies.

1.7 SCOPE OF THE STUDY / LIMITATION OF THE STUDY

This study will focus on major growth and development components which are vital parts of monetary policies. The study will also empirically examine the effectiveness of monetary policies in the Nigerian economy. Factors that affect smooth execution of the project include inadequate finance and short time.

 CHAPTER TWO

2.1 LITERATURE REVIEW

THE MEANING AND CONCEPT OF MONETARY POLICY

Monetary policy is a major tool for economic management and stability which involves measures designed to regulate the volume, cost, availability and direction of credit in an economy to achieve some specified macroeconomic goals.

According to Nwakwo (1991), monetary policy is a measure or combination of measures designed influence the volume, price and direction of money. According to Adesoye (2010), monetary policy is a combination of measures used to regulate the value, supply and cost of money in an economy in consonance with the expected level of economic activity.

Salvin defined monetary policy as the use of open market operations, changes in discount rates, changes in reserve requirements, and other measures available to the monetary authorities to control the growth rate of money supply. John Ranlett in his book titled „the principles of money and banking defined monetary policies as the deliberate management of money supply for the explicit purpose of attaining specific objectives in the sense that monetary policies involves the conscious planned manipulation of the volume of money in circulation to achieve specific objectives of growth, employment and price stability.