Monetary Policy and Economic Growth in Nigeria (From 1986-2021)
CHAPTER ONE
Objective of the study
The main objective of the study is to determine the effect of monetary policy and economic growth in Nigeria. The specific objectives of the study are;
- To assess the impact of money supply on economic growth in Nigeria
- To determine the impact of liquidity ratio on economic growth in Nigeria
- To ascertain the effect of interest rate on Nigeria’s GDP
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Conceptual framework
Monetary policy
Monetary policy is defined by the Central Bank of Nigeria (CBN) as combination of measures designed to regulate value supply and cost of money in an economy, in consonance with the level of economic activities. Odufalu, (1994) defined monetary policy as the combination of measures taken by monetary authorities (e.g. the CBN and the ministry of finance) to influence directly or indirectly both the supply of money and credit to the economy and the structure of interest rate for economic growth, price stability and balance of payment equilibrium. He added that the CBN is empowered by decree 25 of 1991 Act, to formulate and implement monetary policy in Nigeria, in consultation with the ministry of finance subject to the approval of the President. (Onyido, 1993) sums it up when he said that monetary policy is therefore applied to influence the availability and cost of credit in order to control the money supply policy. He generally describe the action taking by the Central Bank as using tools / instrument at its disposal to influence monetary conditions in particular, the quantity and supply of money in the macro-economic goods. These goals would normally include price stability, full employment, high economic growth rate and balance of payments equilibrium. The attainment of these goals will result into the country achieving both internal and external balance of trade and payment. The practice of monetary policy using tools / instruments to regulate the quantity of money supply to achieve stability in the economy is based on the premise that there is a stable relationship between the quantity of money supplied in an economy and economic activities. Even though, the way and manner with which the central bank regulates its money supply vary from place to place the approach can be divided into two main groups. The first group advocates that monetary policy should target price stability as its single important objectives. The other macro-economic goal agitates for due regulation of money supply and in extension in the control of persistent price increase to ensure sustainable and balance development in the economy.
Economic growth
Economic growth, from the early period of economic history, engaged the attention of man and his governments. As far back as 17th and 18th centuries, writers like Adam Smith, David Ricardo, John Stuart Mill, as well as state theorist like Karl Marx, Friedrich List Karl Bucher, W Rostow, and neo classical economists such as Arthur Lewis (1978) have all been preoccupied with the quest for unearthing the forces and processes that cause a change in the material progress of man.
CHAPTER THREE
METHODOLOGY
In carrying out this work, certain methods were used, this chapter explains in depth the procedures followed in arriving at the influence of this research work, research decision is the framework for investigating a research problem or in otherworld’s, refers to the methods used in collecting data which are to be used in investigating and analyzing a research problem. Data collection on its own involves a range of activities from the individuals in libraries extracting information from volumes of materials available as regard this work. Taking into cognizance he fact that two main forms of data collection exist (i.e. the primary and secondary sources). Monetary policy and economic growth in Nigeria as a research work under study will adopt a structural auto-regressive approach to establish a relationship between monetary policy and economic growth in Nigeria. Secondary data will be used in this research work and will be obtained from central bank of Nigeria (CBN) statistical bulletin. The VAR model is an econometric method that facilitates the specification parameter, estimation and aids in formulating monetary policy and their model in Nigeria.
Model Specification
Functional and linear equations: the functional and linear equations which form the model, from the theoretical and literature review in the previous chapter, if is observed that there was a causal link between monetary policy and the Nigerian economy. In this section, we pursue this same objective further by specifying our model. The model is to verify the performance of monetary policy on Nigerian economy. The approach is to modify the model by specifying a multiple regression equation made up of gross domestic product (GDP), as a function of the independent variables (i.e. money supply, integrate, exchange rate, and disqualify ratio). Also, it is obvious that money supply, interest rate, exchange rate, and liquidity ratio will influence gross domestic product in Nigeria.
CHAPTER FOUR
PRESENTATION OF DATA AND DISCUSSION OF RESULTS
PRESENTATION OF DATA
In econometric analysis attempt is usually made in discovering and establishing existing relationship between the different economic variables involved in the analysis. To this effect, this chapter would serve as an attempt to evaluate monetary policy and economic growth in Nigeria. This is done by checking the type of relationship that exists between gross domestic product in Nigeria and money supply, interest rate, exchange rate and liquidity ratio. This shall be done through the use of regression analysis. The computational device is the statistics/data analysis (stata)tm software programmed.
UNIT ROOT TEST
The first point or issue of analysis in this chapter is to conduct the unit roof test so stationary using the augmented dickey fuller (ADF) test. The augmented dickey fuller results comprising of the test statistic and the critical values as originally generated
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
SUMMARY
This project research has traced the evolution of Nigerian monetary policy. Variables such as interest rate, exchange rate, money supply, liquidity ratio and others have been x-rayed to promote the background review to the reader. It discussed the economic development as regards the monetary policy under the period reviewed. The highlight of the Nigerian economy of the 1970s, where the growing importance of oil the expending role of the public sectors in the economy despite the fairly unimpressed economic problems such as the prevailing circumstances, monetary management increasingly faced the weakness of the monetary control framework and large diverging of fiscal operations from the set monetary and credit gargets. The oil boom in the 70’s came to an end in the early ‘80s. Rigorous economic controls were mounted to stem the deterioration. In that framework, monetary policy applied more vigorously credit ceiling. Selective credit controls and regulation of interest rates. In spite of these actions, monetary expansion was very rapid particularly when a temporary oil boom occurred while monetization of oil earnings spurred monetary growth, which was introduced by high domestic credit targets was unsatisfactory. However, one of the lessons of financial liberalization measures do in fact foster development of financial markets of financial system processes, the critical minimum conditions for effective use of the market based monetary instrument can be obtained in the above area where the conditions are fully met. There is scope for improving the situation so as to pave the way for effective implementation of these instrument, vigorous effort must be made to eliminate the excess liquidity which was prevailed in the economy, ensured continues harmonization of fiscal and monetary policies so as to enthrone steeper competition in the banking and financial institution to plug possible loopholes in the economy and improve the database of the banking system
Conclusion
The general conclusion that emerges from this study is that monetary policies adopted during the period under review have been effective in controlling the volume of the economy management. This is an evident that our multiple regression analysis result reveals that monetary policies do have significant effects on Nigeria economy. The study reveals the negative influence of liquidity ratio and interest rate on the economy while the exchange rate and money supply are positively related based on our findings under the studied reviewed. The study also reveals that liquidity ratio and interest rate cause the economy ineffectiveness. Investor did not have access to the cash in other to increase their productivity due to high interest rate. Also, observed is lack of cooperation and incomplete observance of credit guidelines by commercial banks, absence of broad and effective monetary market, lack of capacity and autonomy of Central Bank of Nigeria (CBN) to use its powers and lack of coordination between the use of monetary and fiscal policies in controlling the volume of financial sector credits during the period under review
Recommendation
From the observation and subsequent problems discussed in the study, the following recommendations are proffered as thus. For effective operation of the monetary policy measures in the Nigerian economy, the Central Bank of Nigeria should be granted full autonomy on its monetary policy functions. Partial autonomy should be replaced with full autonomy for the central banks in the developing economies at large which is invariably subjected to government interference and its politics. Though, commercial banks and other financial intermediaries have failed to comply with the stipulated prudential guidelines, it is within the powers of the central bank of Nigeria and other financial authorities to persuade such banks to abide by the regulations governing the issuance of credit to the public. Any deviation from the set regulations should be punished to serve as a deterrent to others. In order for the financial system to function effectively, through the exercise of the techniques of the monetary and capital markets, the policy should be well structured to ensure optimum adherence. The success of any development policy is the proper execution of the plan. To such extent, any application of the techniques of monetary policy without adequate execution will not achieve the desired objectives. Global experience has indicated that monetary policy must work in random to create the right macroeconomic framework in other word such monetary policy applied by the central bank is to great extent depends on coordination with fiscal policy. However, these two phenomena should be articulated in order to bring out effective results. Therefore, the execution of monetary policy through its techniques requires effective and prudent management on the part of the monetary authorities.
References
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