Impact of Monetary Policy Measures as an Instrument of Economic Stabilization in Nigeria
Chapter One
STATEMENT OF OBJECTIVES
The objectives of the study are:
- To analyze the period’s various monetary policy objectives and instruments.
- To ascertain the level of success of policy measures against desired objects.
- To identify the factors that tends to hinder the full attainment of desired objectives.
- To recommend the appropriate policy measures for the achievement of specific objectives as well as recommend solution to problem that hinders the full attachment of such objectives.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
CONCEPTUAL REVIEW
The Central bank of Nigeria (CBN) defined monetary policy, as a deliberate action of the monetary authorities to influence the quantity, cost and availability of money credit in order to achieve desired macroeconomic objectives of internal and external balances. The action is carried out through changing money supply and/or interest rates with the aim of managing the quantity of money in the economy.(H. Johnson) defines monetary policy “as policy employing central bank‟s control of the supply of money as an instrument for achieving the objectives of general economic policy.” Shaw (1999) defines it as “any conscious action undertaken by the monetary authorities to change the quantity, availability or cost of money.”Monetary policy is known to be a vital instrument that a country can deploy for the maintenance of domestic price and exchange rate stability as a critical condition for the achievement of a sustainable economic growth and external viability (Adegbite and Alabi; 2013). 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 away as to promote the social welfare (Ajayi, 1999). This role is anchored on the use of monetary policy that is usually targeted towards the achievement of full-employment equilibrium, rapid economic growth, price stability, and external balance. 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 macroeconomic stability. 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 macroeconomic stability (Aliyu and Englama, 2009). The most popular instrument of monetary policy was the issuance of credit rationing guidelines, which primarily set the rate of change for the components and aggregate commercial bank loans and advances to the private sector. The sector allocation of bank credit in CBN guidelines was to stimulate the productive sectors and thereby stem inflationary pressures. The fixing of interest rate at relatively low levels was done mainly to promote investment and growth. 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 economist, 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 internal and external balance and the promotion of long- run economic growth. The importance of price stability derives from the harmful effects of price volatility, which undermines the ability of policy makers to achieve other laudable macroeconomic objectives. 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. Typically, in periods of high inflation, the horizon of the investor 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 components. Monetary policy in Nigeria has been carried out through the portfolio behavior of the CBN in terms of the control of its credit and management of reserves. Credit control is being used to check movement in domestic price level, while the exchange rate policy serves as measure for determining the competitiveness and current account performance as well foreign reserves.
OBJECTIVES OF MONETARY POLICY
(Kahn, 2010) observes that monetary policy objectives are concerned with the management of multiple monetary targets among them price stability, promotion of growth, achieving full employment, smoothing the business cycle, preventing financial crises, stabilizing long-term interest rates and the real exchange rate. Through the control of monetary policy targets such as the price of money (interest rate – both short term and long term), the quantity of money and reserve money amongst others; monetary authorities directly and indirectly control the demand for money, money supply, or the availability of money (overall liquidity), and hence affect output and private sector investment. Full employment has been ranked among the foremost objectives of monetary policy in Nigeria. According to Keynes, full employment means the absence of involuntary unemployment. In other words full employment is a situation where all the labour force is employed. Keynes also gave an alternative definition of full employment in his General theory thus: “It is a situation in which aggregate employment is inelastic in response to an increase in which aggregate employment is inelastic in response to an increase in the effective demand for its output.” Thus the Keynesian concept of full employment involves three conditions: (i) reduction in the real wage rate; (2) increase in effective demand; and (iii) inelastic supply of output at the level of full employment. Price stability is one of the most important objectives of monetary policy in Nigeria. Fluctuations of price levels can bring instability in the economy. A policy of price stability keeps the value of money stable, eliminates cyclical fluctuations, brings economic stability, helps in reducing inequalities of income and wealth, secures social justice and promotes economic welfare. Price stability does not mean prices remain unchanged indefinitely. (Dasgupta and Hagger) defined price stability as “ a stability of some appropriate price index in the sense that we can detect no definite upward trend in the index after making proper allowance for the upward bias inherent in all price indexes.”Price stability can be maintained by implementing a counter cyclical monetary policy during economic recession and dear monetary policy during economic boom. Economic growth can be defined as the process whereby the real per capita income of a country increases over a long period of time. Economic growth is measured by the amounts of goods and services produced in a country. It is a desirable goal for Nigeria. Balance of payments on the other hand is a monetary policy adopted since the 1960s in Nigeria to maintain equilibrium in balance of payments. The achievement of this goal has been necessitated by the phenomenal growth in the world trade as against the growth of international liquidity.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought impact of monetary policy measures as an instrument of economic stabilization in Nigeria
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information impact of monetary policy measures as an instrument of economic stabilization in Nigeria. 200 staff of CBN, Abuja was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain impact of monetary policy measures as instrument of economic stabilization in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of monetary policy measures as instrument of economic stabilization in Nigeria
Summary
This study was on impact of monetary policy measures as instrument of economic stabilization in Nigeria. Four objectives were raised which included: To analyze the various monetary policy objectives and instrument for the period, to ascertain the level of success of policy measures against desired objects, to identify the factors that tends to hinder the full attainment of desired objectives and to recommend the appropriate policy measures for the achievement of specific objectives as well as recommend solution to problem that hinders the full attachment of such objectives. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of CBN, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The role of the Central bank in regulating the liquidity of the economy which affects some macroeconomic variables such as the output, employment and prices cannot be over-emphasised. The Central Bank of Nigeria over the years has adopted different monetary policy management techniques to keep the economy in a stable state. Before the structural adjustment of 1986 which ushered in a period of financial deregulation, it adopted a system of direct control through the issue of credit guidelines and interest rate fixation but from the later part of the 1980s, it adopted indirect control system of management by resorting to open market operations, adjustment of legal reserves requirement and the rediscount rate. But in all these, the attainment of the desired objectives of monetary policy has been affected by domestic and external environments which include fiscal dominance, underdeveloped nature of the financial markets, external debt overhang and volatility in oil price, Sanusi (2002)
Recommendation
Monetary policies should be used to create a favourable investment climate by facilitating the emergency of market based interest rate and exchange rate regimes that attract both domestic and foreign investments, create jobs, promote non-oil export and revive industries that are currently operation far below installed capacity. In order to strengthen the financial sector, the Central Bank has to encourage the introduction of more financial instruments that are flexible enough to meet the risk preferences and sophistication of operators in the financial sector
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