The Effect of Monetary Policy on Agricultural Output in Nigeria
Objectives of Study
The main objectives of this research are as follows:
1) To identify the monetary policy instruments used to support the agricultural sector.
2) To examine the impact of prime lending rate, cash reserve ratio, agricultural credit guarantee scheme fund and money supply on agricultural output.
3) To find out if there is a long-run relationship between certain monetary channels and variables such as real exchange rates, monetary policy rate, private investments in agriculture, agricultural credit guarantee scheme fund, and agricultural output.
This study shall be examining the relationship between monetary policies and agricultural output.
Monetary policy in the Nigerian context refers to the actions of the Central Bank of Nigeria to regulate the money supply which could be through discretional monetary policy instruments such as the open market operation (OMO), discount rate, reserve requirement, moral suasion, direct control of banking system credit, and direct regulation of interest rate (Iyoha, 2002)
Contractionary or expansionary depending on existing circumstances, the success of monetary policy in an economy depends on the operating economic environment, the institutional framework adopted and implementation with a view that there is a stable relationship between the quantity of money in an economy and her economic activities with the prime aim being to make sure that money supply is in consonance with the growth level of the economy without committing errors (Nzotta & Okereke 2009).
Friedman, M. (1969) defines monetary policy as the action taken by the monetary authorities usually the Central Bank to affect monetary and other financial conditions through influence over the availability and cost of credit in pursuit of the broad objectives of sustainable growth of output, price stability and a healthy balance of payments position. The discretionary control of the money stock to him involves the expansion or contraction of money and influencing interest rate to make money cheaper or more expensive depending on the prevailing economic conditions and thrust of policy. He went further to classify the instruments of monetary control into two broad categories – direct and indirect instruments. Under a system of direct monetary control, the Central Bank uses some criteria to determine monetary, credit and interest rate targets that would achieve the goals of economic policy. In a regime of indirect monetary control, the monetary base (specifically bank reserves) is managed while the market is left to determine interest rates and credit allocation.
The Central Bank of Nigeria (CBN) derives its mandate from the CBN Act of 1958. Section one of the CBN Decree No. 24 of 1991, stipulates that the principal objects of the Bank shall be to issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency, promote monetary stability and a sound financial system in Nigeria, and act as banker and financial adviser to the Federal Government (CBN, 2006). Therefore the central bank is the principal monetary authority.
This section presents the research method adopted for the study. This research provides us with the frame work for model specification, parameter estimation, evaluation technique, data collection and transformation for the study.
An econometric model stipulates some aspect of the real economy. It concentrates on the point it is studying and leaves out the thing not essential. The study will adopt the model of Kogar (1995), to empirically re-evaluate the impact of monetary policy on agricultural output. The specification of the model is related to the information relevant to the study.
Thus to study any relationship between variables, it is essential to express it in mathematical form.
The research techniques postulate a functional model to capture the objective as follows
AGRQt = F [INTRt, CRRt, DMBAt]……………………………………………..[3.1]
The mathematical form of the model is represented as
In AGRQt = β1 + β 2INTRt + β 3InCRRt + β 4InDMBAt + µt ……………[3.12]
In AGRQt = Log of Agricultural Output
INTRt = Interest Rate
In CRRt = Log of Cash Reserve Ratio
In DMBAt= Log of Deposit Money Bank Credit to Agriculture
β1 = intercept
β 2, β 3 ,β 4 are partial slopes or parameters
µ t = the stochastic term.
PRESENTATION AND ANALYSIS OF RESULT
The result of the ordinary least square (OLS) regression model was presented in this chapter. The analysis of the result was subjected to economic criteria, statistical first order test and econometric second order tests. An OLS model was estimated to re-evaluate the impact of monetary policy on agricultural output in Nigeria.
Analysis of Unit Root and Co-Integration Results of Model I
To test for the unit root, we employ Augmented Dickey-Fuller (ADF) test. The results are shown in the table below.
SUMMARY, POLICY RECOMMENDATIONS AND CONCLUSION
In this study, we set out to empirically re-evaluate the impact of monetary policy on agricultural output in Nigeria from 1980- 2015. The study was conducted to ascertain how monetary policy effect agricultural output.
Secondary data was used; the source of data included CBN Statistical Bulletin (2015). In order to achieve the objectives of the study, an econometric model was formulated using the Ordinary Least Square (OLS). In the model agriculture output was regressed on interest rate, cash reserve ratio, and deposit money bank on agriculture.
The major findings of the study are summarized below:
- The result has established a negative but significant relationship between interest rate and agricultural output. This has been found to be consistent with the theory.
- The result also revealed a positive and significant relationship between cash reserve ratio and agricultural output. This has been found to be consistent with the theory.
- The result also revealed a negative and significant relationship between deposit money bank to agriculture and agricultural output. This has been found to be inconsistent with the theory.
In this study, we re-evaluated the impact of monetary policies on agricultural output in Nigeria from 1980 – 2015. From our findings, there exist a negative but significant relationship between interest rate and agricultural output.
Also, the result revealed a positive and significant relationship between cash reserve ratio and agricultural output. The general conclusion is that interest rate, cash reserve ratio, and deposit money bank to agriculture have impact on agricultural output.
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