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ASSESSMENT ON THE EFFECTIVENESS OF MONETARY POLICY ON ECONOMIC STABILIZATION

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Abstract

The highly unstable economic conditions in Nigeria have been a major source of concern among economist and policy makers in recent time. These economic problems can be attributed to the existence of market failure and the inability of the mechanism to efficiently allocate scarce resources among economic agent. This research work is sets out to examine the extent to which government Interventions through monetary policy have been able to regulate the economy by ensuring the general price stability and economic growth. From the research work, we discovered that monetary policy through the use of the instruments of interest rate, exchange rate, treasury bills and money supply has been a major instrument used to boast economic growth and achieve economic stabilization. This work also viewed the different schools of thought and their option about the use effects and setbacks of monetary policy in stabilization of an economy, the classical and the Cambridge model viewed money as a sto

CHAPTER ONE

Introduction

• Background To The Study

Monetary policy is the process by which the monetary authority of a country like the CBN or currency board, control the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Further goals of monetary policy are usually to contribute to economic growth and stabilization, to lower unemployment and to maintain predictable exchange rates with other countries.

Since the 1970’s, monetary policy has generally been formed separately from fiscal policy, which refers to taxation, government spending and associated borrowing. The main objective of monetary policy in Nigeria is to ensure price and monetary stability. This was evident in the year 1988 – 1990 which was a prescriptive and restrictive one in terms of federal government monetary policies. The country was fully mortgaged to the external creditors like IMF, WORLD BANK, London and Paris club etc. the mortgaged was done under the canopy of the structural adjustment program (SAP) through the instruments of sound tiers foreign exchange market (STFEM). The conduct of monetary policy by the central bank of Nigeria since 2008 has now been designed to influence the growth of money supply consistent with the required aggregate gross domestic product (GDP) growth rate, ensure financial stability, maintain a stable and competitive exchange rate of Naira

Before the establishment of the central bank of Nigeria in 1958, monetary policy was largely conducted by the West Africa currency board though it had no discretionary power over the total amount of money and could not perform any banking function. The establishment of monetary institution such as the central bank of Nigeria was quite appropriate to enable it to contribute to economic development. Following the B. Loyne act of parliament known as central bank act to perform traditional banking function and serve as the pivoted of national functional institution.

The federal government through the central bank (CBN) acts of 1958 mandates the banks to promote and maintain monetary stability and sound financial system in Nigeria. Like any other central bank, the CBN monetary policies pursue price stability and sustainable economic stabilization. These encompass the attainment of full employment, stability in the long – term interest rates and the pursuing optimal exchange rate targets. In pursuit of these objective, the CBN operate through a system of targets which are the operational targets, the intermediate targets, and the ultimate targets (Ibeabuchi 2007)

The CBN uses it operational target (unborrowed reserve) over which it has deterministic control to influence the intermediate target (broad money) which eventually affects the ultimate or policy target (Inflation and output).  In setting its targets, the CBN considers an information set that is fed into monetary policy decision process by contemporaneous and lagged values of real gross domestic product (GDP) real investment prices, real wages, labour productivity, fiscal operations and balance of payment performance among others. Depending on the relative important attached to the various information elements. The CBN set its target parameters for it quantity-based nominal anchor and it price – based anchors

The banks generally implement it monetary policy programs using the market – based and rule – based technique (chukwu 2009).  When implementing monetary policy using the rule – based technique, the CBN uses direct instrument like selective and moral suasion.  While indirect instrument like the open market operation (OMO), discount rate and the reserve requirement are used when implementing monetary policy program using the market – based approach

Since the inception of the central bank of Nigeria (CBN), it is a well-known fact that the implementation of federal government monetary policy objectives has been a crucial problem. Very sound and praise worthy policies have been formulated in respect to many issues in the country but their execution had remained the problematic area.

There is no doubt that the volume and growth of money stock and structure of interest rate plays an important role in the operation of the macro – economy. Hence the study seeks to assess the effectiveness of monetary policy as a tool of economic stabilization.

• Statement Of Problem

There is no consensus among different schools of thought in economics with regards to the effectiveness or even appropriateness of using monetary policy as a tool of economic stabilization

Although some progress has been made by central bank of Nigeria (CBN) toward resolving the structural imbalance in the economy, there is still a lot of disagreement and problems that are involved in the implementation of monetary policy in Nigeria. These perceived problems are being claimed to have caused a fast decline in the economic growth of Nigeria.

In view of these persistent economic instability experienced in Nigeria, some researchers have looked at interest rate, money supply, minimum rediscount rate, consumer price index, and inflation as tools of monetary policy used in other to achieve economic stabilization.  But this study intends to include exchange rate and treasury bills, and to examine the extent to which variation in gross domestic product (GDP) and stock of money supply has been and can be used to influence output in Nigeria.

• Research Questions

The following research questions will help to achieve the above objective

1. How have changes in interest rate, money supply, exchange rate and treasury bills influenced output in Nigeria?
2. To what extent has variation in gross domestic product (GDP) and stock of money supply affected economic growth in Nigeria?

• Objectives of the study

The general objective of this study is to look at the effectiveness of monetary policies in Nigeria economic stability.

Specifically to:

1. To examine how changes in interest rate, money supply, exchange rate and treasury bills influence output in Nigeria.
2. To ascertain the variation between Gross Domestic Products (GDP) and stock of money supply.

 

 

 

• Research Hypothesis

The research hypotheses to be tested are as follows

 

Ho       There is no significant relationship between changes in money supply, interest rate, exchange rate and treasury bills in Nigeria

Ho       Variation in Gross Domestic Product (GDP) cannot be explained by variation in the stock of money supply

• Significance of the Study

The study will help monetary authority to identify some lapses and short – coming in the implementation of monetary policies

The study will be of importance to policy makers especially the federal government and the central bank of Nigeria (CBN) who will from it, know the best instrument of credit control to be issued by CBN to other banks and financial institutes that could be effective in economic stabilization in Nigeria.

It will also assist monetary authority in evaluating the true economic realities of the country by formulating monetary policy for specific economic goal. The study will also aid policy makers decide on the appropriate policy instrument needed to achieve the ultimate macro – economics objectives of attainment of high rate economic growth and deflation.

 

 

• Scope Of the Study

This study focused on monetary policy, it formulation and implementation in order to achieve economic stabilization. The work covered the effectiveness of monetary policy in Nigeria economy for the period of 1980 – 2015

Limitation of this study is found in the interpretation of the years. Some of the effects of the policy do note merge immediately within that year but takes sometimes or certain longer period before it manifest. This makes it relatively difficult to assess critically how the objectives gotten for each year have been achieved within that year. Some of the impacts can be felt after some years. This seriously constitutes a limitation to the study.