Social Science Project Topics

The Impact of Monetary Policy on Economic Growth in Nigeria

The Impact of Monetary Policy on Economic Growth in Nigeria

The Impact of Monetary Policy on Economic Growth in Nigeria

CHAPTER ONE

Objectives of the Study

The General objective of the study is to find out the extent to which monetary policy (captured by MPR) could bring about Economic growth (stability in inflation, interest and exchange rates) in Nigeria. Consequently, the following is the specific objective of the study:

To investigate how interest rate, exchange rate and inflation respond to shocks in monetary policy rate (MPR).

CHAPTER TWO

LITERATURE REVIEW

 Conceptual Literature;

Overview of inflation

Inflation could be defined as an economic situation in which the increase in money supply is “faster” than the new production of goods and services in the economy (Hamilton, 2001).  More often than not economists draw a line of difference between inflation and an economic condition of a onetime increase in price or when there are price increases in a narrow group   of economic goods and services (Piano, 2001). Consequently, inflation signifies a general and persistent increase in the prices of goods and services in an economy (Ojo, 2000; Melberg, 1992).

Usually, the rate of Inflation is measured by the percentage change in the price index, which may be wholesale price index, producer price index, retail price index, or consumer price index. In Nigeria, inflation is measured as the percentage change in the consumer price index, which aggregates the price of a representative basket of goods and services purchased by the average consumer, and obtained through periodic survey of consumer prices (CBN, 2005; Essien, 2002).

The National Bureau of Statistics has the statutory responsibility for compiling inflation statistics in Nigeria. Different weights are assigned to the goods in the representative consumer basket. As a result of these weights, changes in the prices of some goods in the basket exert varying effects on measured inflation. However, in this research work we used the headlines inflation used by CBN as against the consumer price index.

The year-on-year headline inflation was preferred because of the following disadvantages associated with the consumer price index (CPI) as a measure of the price levels; first it does not reflect goods and services bought by firms or government, such as machinery. Second, it does not reflect the changes in the quality of goods which might have occurred over time. Third, changes in the price of substitutable goods are not captured. Lastly, CPI basket usually does not change often. Inflation could also be measured by GDP deflator, though it is sparingly used because CPI represents the cost of living and is therefore more appropriate for measuring the welfare of the people.

 

CHAPTER THREE

METHODOLOGY

Research Methodology

The model specification adopted is the Ordinary Least Square technique(OLS) . Descriptive analysis is carried out using the Pearson Product Moment correlation coefficient and the Unit Root Test (Augmented Dickey Fuller) . The causality test is done using the Granger causality tests.

Sources of Data

The study made use of data mainly from secondary sources, particularly unpublished data from the research as well as monetary policy departments of CBN.  We equally used data from the published works in CBN official websites, Statistical Bulletins, monthly journals, financial reviews as well as annual Reports and various Communiqués of the monetary policy committee meetings. Another source of data for the study included statistics and published materials by the National Bureau of statistics (NBS), Nigerian Economic Society, newspapers, magazines, journals, seminar papers as well as my previous lecture notes and similar studies conducted in the department. The variables involved in the study are monetary policy rate (i), market rate of interest (l), inflation rate (In), and exchange rate (x).

CHAPTER FOUR

ANALYSIS OF THE RESULTS

UNIT ROOT TEST

The empirical analysis started with the investigation of the time series properties of each variable employed in the study by using both the Augmented Dickey Fuller  (ADF)  and Phillip Peron (PP) tests to determine the order of integration of the series. Table 2 below has shown that the two tests were consistent, signifying that the MPR, NEER, INF as well as LEND are all stationary at first difference which implied that,  they were  all  integrated  of order one.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

 SUMMARY

The study theoretically and empirically investigated how inflation, interest and exchange rate respond to shocks in monetary policy (captured by MPR). The research work used monthly data, beginning from December, 2006 (when the MPR was introduced) through February, 2012. The Structural VAR was employed to estimate the model, where the impulse response revealed how the inflation, interest and exchange rates responded to shocks in MPR and the variance decomposition brought to the limelight the impact of MPR on these Macroeconomic variables. The Granger Causality was equally used to disclose the causal direction among the variables, while Augmented Dickey Fuller (ADF) was conducted on all the variables before the estimations to establish the absence of stochastic process.

OUTLINES OF MAJOR FINDINGS

  • Inflation responds to shocks in MPR only in a volatile manner (a pattern that is almost unpredictable); in the first four periods, positive shocks in MPR could not bring down inflation but thereafter, any further increase in MPR produced gradually declining but positive interest
  • Exchange rate responds to shocks in MPR in a relatively downward fashion and quickly assumes upward trend from the second period lasting throughoutthe
  • Interest rate responds quickly and positively to shocks in MPR from the first thorough the last period. Therefore, MPR has its greatest influence on interest rate (prime lendingrate).
  • Of all the three macroeconomic variables, inflation is the most difficult to deal  with and cannot always be successfully conquered with the manipulation of MPR
  • Low and stable interest and exchange rate can only be achieved when inflation is low and Hence, inflation is the greatest enemy of oureconomy.
  • Changes in the interest and exchange rate as well as MPC meetings can be used to predict

CONCLUSION

The study concludes that both interest (prime lending rate) and exchange rates respond quickly and almost in a predictable way to shocks in MPR. However, changes in MPR do not automatically and consistently produce changes in inflation and above all inflation responds to shocks in MPR only in a volatile manner (a pattern that is almost unpredictable). Hence of all the three variables, inflation is the most difficult to deal with (stability of which could leads to stability in the remaining two) and could not be totally addressed by mere manipulations of MPR. Hence low and stable inflation is a necessary condition for the achievement of low and stable interest and exchange rate. We also conclude that MPR is also responsive to Monetary Policy Committee (MPC) meetings.

RECOMMENDATIONS
  • Other monetary policy instruments particularly Cash Reserve Requirements (CRR) and especially, OMO should be prudently used to compliment MPR in achieving Economic growth.
  • The current monetary tightening stance of the CBN is a step in the right direction but should be used with caution. Considering the dual objective of CBN, themonetary policy should be tailored to promote real sector lending while trying to achieve low and stable
  • There is the need for policy harmonization between the monetary and fiscal authorities. Budget deficit should be avoided and more fund be appropriated for capital as against the recurrent
  • CBN should license more banks to operate non-interest banking so as to boost financial deepening and inclusion. The large informal sector in the country that cripples the transmission mechanism of monetary policy and constraints the ability of CBN to control money supply was to some extent caused by cultural and  religious belief that interest is unlawful; this could be avoided by introducing more non-interest banks.
  • The “cashless policy” of CBN should be maintained, made more efficient and user friendly. Researches have shown that a system that is cash based is inefficient and distorts transmission mechanism. More efficient point of sale (POS) terminals, multifunctional ATMs as well as mobile payment compatible system should be put in
  • There is the need for proper enlightenment of the public about any new CBN policy initiatives (e.g. non-interest banking & cash-lite policy). The communication strategy should be clear and
  • The physical and social infrastructures of the economy should be improved to reduce the cost of doing business and by extension the interest charged by the
  • The three tiers of Government should exercise fiscal prudence and fiscal responsibility act be fully implemented. More so, Banks and Other Financial Institutions should improve their operational efficiency by cutting down overhead and any other unnecessary expenses.
  • The CBN should reduce or strike out any unnecessary stringent documentation requirement for the purchase of forex in the official market. This would kill patronage and by extension the life of parallel market/street
  • To ensure policy continuity and consistency, the rate of turnover of CBN Governors should be checked and the frequency of MPC meetings be reduced to at most quarterly unless in case of
  • The Oil and Gas sector should be fully deregulated, corruption in the sector and other sectors of the economy be fought to the latter and above all the saved subsidy proceeds be used to boost physical infrastructure. This would reduce pressure on forex demand as well as cost of doing business and in addition boost external reserve in the
  • Last but not the least, CBN should avoid policy summersault, a situation where CBN would initiate a policy that originally supposed to be applicable to all economic agents (e.g. cash-lite) and latter begin to exonerate some agents (e.g. government parastatals, foreign embassies, Primary Mortgage Banks, Microfinance Banks etc.) from compliance, would not augur well for the If Monetary Policy must strive, the credibility of CBN should be held in high esteem especially under condition of uncertainty.

REFERENCES

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  • Central Bank of Nigeria Annual Report and Statement of Accounts, CBN, Abuja; Year 2009, 2010 and 2011.
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  • Communiqués of the Monetary Policy Committee meetings, Central Bank of Nigeria; Various Months.
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