THE IMPACT OF MONETARY POLICY ON ECONOMICS GROWTH IN NIGERIA (1986-2015)
TABLE OF CONTENTS
Table of contents
Background of the study
Statement of the problem
Objective of the study
Hypothesis of the study
Significance of the study
Scope of the study
Sources of Data
Result and Discussion
Discussion of the result
Summaries, Conclusion and Recommendation
Summary of findings
The study examined the impact of money supply on economic growth in Nigeria. In the model specified red gross domestic product (real GDP) is the regress while broad money supply interest rate and exchange rate are the regressions. Data was collected from CBN Statistical Bulletin for the period 1986-2015. The Statistical techniques used for the analysis Bulletin for the ordinary least square techniques. The research indicates the real interest rate and real exchange rate in Nigeria within the period under study failed to influence real gross domestic product (real GDP) with in the period under study. It has been indentified that the major problem militating against the poor performance of monetary policy instrument influencing real GDP in Nigeria is time legs involved which now makes any policy employed by the government to take many months to achieve its full effect. In effect to this, effectiveness of influencing real gross domestic product in Nigeria may be promoted by emphasizing on broad money supply instead of on monetary target variable due to the fact the broad money supply is statistically significant.
Background of the Study
Since its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a Central Bank, which is the regulation of the stock of money in such as way to promote the social welfare (Ajayi, 1999). This role is anchored on the use of monetary policy that is usually target towards the achievement of full-employment equilibrium rapid economics growth, price stability, and external balance (Adesoye et al, 2012). Over the years, the major goals of monetary policy have often been the two later objectives. Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on assumption that these are essential tools of achieving macroeconomics stability. (Aliyu and Englama, 2009)
The economics environment that guided monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the public sector in the economy and over dependence on the external sector. In order to maintain price stability and a health balance of payment position, monetary management depended on the use of direct monetary instruments. Such as credit ceiling, selective credit controls administered interest and exchange rates, as well as the perscription of cash reserve requirement and special deposits. The use of market based instruments was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberates restraint of interest rates.
The most popular instrument of monetary policy was the issuance of credit rationing guidelines which primarily set the rates of change for the component and aggregate commercial bank loans and advances of the private sector. The sectoral allocation of bank credit in CBN guideline was to stimulate the productive sectors and thereby stem inflationary pressures. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of free reserves and credit-crediting capacity of the banks. Minimum cash ratios were usually lower than those voluntarily maintained by the bank they proved less effective as a restraint on their credit operations.
In general terms, monetary policy refers to a combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activity (Okwu et al, 2011; Adesoye et al, 2012).
For most economics, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development (Folawewo and Osinubi, 2006). These objectives are necessary for the attainment of balance of payment and the promotion of long run economic growth.
The importance of price stability devices from the harmful effect of price volatility which under mines the ability of policy maker to achieve other laudable macroeconomic objective. There is indeed a general consensus that domestic price fluctuation undermines the role of money as a store of value, and frustrates investments and growth. Empirical studies (Ajayi and Ojo, 1981; Fischer, 1994) on inflation, growth and productivity have confirmed the long term inverse relationship between inflation and growth with the achievement of price stability, the conditions in the financial market and institution would created a high degree of confidence. Such that the financial infrastructure of the economy is able to meet the requirement of market participants. Indeed, an unstable or crisis-ridden financial sector will reader the transmission mechanism of monetary policy less effective, making the achievement and maintenance of strong macroeconomics fundamental difficult. This is because it is only in a period of price stability that investors and consumers can interpret market signals correctly. Typically, in period of high inflation the horizon of the investors is very short, and resources are diverted from long-term investments to those with immediate returns and inflation hedges, including real estate and currency speculation. It is on this background that this study would investigate the effectiveness of the monetary policy in Nigeria with special focus on major growth component.
Statement of the Problem
Ensuring rapid economic growth is the major macroeconomic goal of every economy. Economic growth is simply defined as a quantitative increase in a country output of goods and services. (Onwukwe 2003).
Monetary policy is of importance to every developing nation. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria has experienced high volatility in inflation rates. Since the early 1990’s there have been four major episodes of high inflation in excess of 30 percent. The growth was often in excess of real economic growth. However, preceding the growth in money supply. Some factors reflecting the structural characteristic of the economy are observable some of these are supply shocks; arising from factors such as famine, currency devaluation and change in term of trade.
For this research to be worthwhile, the researcher is interested in these problems such as:
Why has monetary policy introduced in Nigeria on the previous years not been able to achieve any meaningful result?
Could it be that the policies are not effective in achieving economic growth?
Do the policies need further revenue to make it more effective?
Is our financial system reliable in helping in the implementation of the policies?
What is the impact of monetary policy on Nigeria economic growth?
It is on this perspective that the impact of monetary policy on Nigeria’s economic growth will be studied.
Objective of the Study
The main objective of this study is to assess the impact of the monetary policies in Nigeria.
However, the following specific would also be achieved.
To evaluate the performance of monetary policy in Nigeria over the years.
To empirically investigate the impact of the monetary policy on economic growth and other major growth components in Nigeria.
To make recommendation based on the finding.
Hypothesis of the Study
The hypothesis to be tested in the course of this research work is;
H0: The monetary policy instrument does not have significant impact on the economic growth in Nigeria.
H1: The monetary policy instruments have significant impact on the economic growth in Nigeria.
Significance of the Study
This study will be of great benefit to bankers, investment analysis, government agencies, academics, private and public sectors more so, it will be useful to policymaker in the attempt to fashion out dynamic and reliable monetary policy measure for controlling commercial banks ability to create money and thereby influence the effective development of the economy.
Scope of the Study
The economy is a large component with lots of diverse and sometimes complex parts: This study will only focus on major growth component such as the gross domestics’ product, price level, exchange rate and the balance of payment equilibrium. This study will cover all the facts 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 the macroeconomic variable in Nigeria shall be restricted to the period between 1986 and 2015, the study would also examine the monetary policy regimes that have adopted in Nigeria since 1960s to date as well as evaluate it’s performance.
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