An Evaluation of Monetary Policy in Nigeria and Its Impact on Economic Growth (1984 – 2015)
Chapter One
Objectives of the Study
The broad objective of this study is an evaluation of monetary policy in Nigeria and its impact on economic growth (1984 – 2015). The specific objectives are as follows:
- To analyze the relationship between monetary policy and economic growth in Nigeria.
- To assess the effectiveness of monetary policy as a tool for promoting economic growth in Nigeria.
- To identify challenges facing the proper implementation of monetary policy in Nigeria.
CHAPTER TWO
Literature Review
Theoretical Review
Monetary policy is the process by which the central bank or monetary authority controls the supply of money, availability of money and the cost of money or rate of interest. Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy.
These goals usually involve stable price and low unemployment. Monetary theory provides insight into how to craft optional monetary policy.
According to J.M Keynes, “an inverse in the quantity of money increases aggregate money demand on investment as a result of the fall in the rate of interest˝. The increase investment will raise effective demand through the multiplier effect thereby increasing income, output and employment. Therefore when there is full employment, increase in income and output, price will change in the same proportion as the quantity of money (Jhingan, 2003). This theory deals on short run economy, which tends towards the area of macroeconomics but has contributed greatly to monetary economic.
The monetarist- new quantity theory of money- believes in the supreme efficiency of monetary policies by arguing that money is the most important regulatory instrument in an economy and that money has a direct effect on the economy. Hence, if money supply increases, it will eventually decompose itself, which invariably leads to an increase in the cash balance of the various individuals and economy agents in relation to prices of investment asset which is a case of portfolio theory.
Therefore the demand for money (or velocity) is not a fixed quantum but varies in a fairly predictable fashion with the return on both bond and equities, the price level, price expectation, wealth and permanent income and taste and preference (Anyanwu, 1993).
According to the Cambridge version of the quantity theory of money, they did not subscribe to the belief that money matters and that doubling the money supply will lead to doubling prices. They were of the view that the result will be less than certain and that doubling of money supply will not necessary lead to double of prices. The Cambridge version focuses on the fraction K of income held as money balances.
Thus, the version can be expressed as: M=KPY or M=KY. The K is the inverse of V, the income velocity of money balances in the original formulation of the quantity theory. The Cambridge version directs attention to the determinants of the demand for money rather than the effects of changes in the supply of money (Higgins, 1978).
According to Sir Irving Fisher quantity theory of money, he states that “the quantity of money is the main determinant of the price level, of the value of Money”. Any change in the quantity of money produces an exactly proportionate change in the price level, that is, “as the quantity of money in circulation increases, the price level also increase in direct proportion and the value of money decreases and vice versa (Jhingan,1986). This theory is explained in terms of equation of exchange: PT=MV+M’V’ which states that the money supply (M) multiplied by its velocity of circulation (V) must always be equal to the number of transaction. The theory is based on long run economy and underdevelopment is considered as one of the problems relating to the less developed economy.
CHAPTER THREE
RESEARCH METHODOLOGY
This section focuses on the methodology to determine the influence of monetary policy on economic growth in Nigeria, covering the period, 1990-2010. In carrying out analysis of this study, Ordinary Least Square (OLS) method of analysis will be employ to analyse our data, using three Multiple regression models with Gross Domestic Product (GDP), inflation rate and balance of payment as the dependent variables while liquidity ratio, cash ratio, and money supply as the explanatory variables.
SOURCES OF DATA
The data for this study shall be obtained mainly from secondary sources, particularly from Central Bank of Nigeria (CBN) publications. This study will make use of econometric approach in estimating the relationship between selected monetary policy components and major growth components.
MODEL SPECIFICATION
The three models to capture the impact of Federal government monetary policies on Nigerian macroeconomic variables are stated below with the independent variables as liquidity ratio, money supply and cash ratio while the dependent variables will be gross domestic product, inflation rate and balance of payment total; so that: impact of monetary policy in Nigeria using quantity theory developed by Irving Fisher in the inter-war years.
The model is expressed as:
CHAPTER FOUR
PRESENTATION OF DATA AND RESULT
Presentation of data for analysis
CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
CONCLUSION
Given the result of the estimated model, it shows that various monetary policies administered through those variables have not probably been adequately applied to help propel growth. However, below are the conclusions drawn from the study:
1). That there exist an obvious correlation between monetary policy and growth in Nigeria.
2). That the various monetary policies of the government are sustainable if properly managed.
RECOMMENDATIONS
1). To fasten up the rate of growth of the Nigerian economy, government needs to initiate and push forward effective and efficient monetary policy measures via money supply, interest rate e.t.c. in order to adequately stabilize prices, reduce poverty and inequality by encouraging holistic macroeconomic growth.
2). There is also the need to put in place an enabling policy instruments and strategies in the likes of increasing available domestic credit via potent interest rate in-order to encourage production.
3). Finally, government should deepen the level of finance in the economy; this would encourage investment through provision adequate credit facilities required for optimal performance of real sector of the economy.
REFERENCE
- Adeoye, B.; Ojapinwa, T. V. and Odekunle, L. A. (2014) “Monetary Policy Framework and Pass-Through in Nigeria: A Missing Ring”. British Journal of Arts and Social Sciences. Vol. 17, no. 1, pp. 14-32.
- Adeoye, B. W. (2007): Impact appraisal of monetary and fiscal policy reforms on macroeconomic performance in Nigeria. Union Digest Vol. II Nos. 3 and 4 December.
- Adesoye, A. B.; Maku, O. E. and Atanda, A. A. (2012) “Is Monetary Policy a Growth Stimulant in Nigeria? A Vector Autoregressive Approach”. Munich Personal RePEc Archive (MPRA). Paper No. 35844, pp. 1-24.
- Ajayi, I. (1999) “Evolution and Functions of Central Banks”. Central Bank of Nigeria Economic and Financial Review. Vo. 37, no. 4, pp. 11-27.
- Ajayi, S. I. and Ojo, O. O. (1981) Monetary and banking analysis and policy in the Nigerian context. London: George Allen and Union Ltd.
- Ajayi, S.I. (1978). Money in a Developing Economic: A Portfolio Approach to Money supply Determination. Ibadan: Ibadan University Press.
- Ajayi, S.I. (1973). An Economic Case Study of the Relative Importance of Monetary Policy and Fiscal Policy in Nigeria. Bangladesh Economics. CBN Review. Vol.2, No. 33 Pg, 559-761.