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EFFECTIVENESS
OF MONETARY POLICY IN STIMULATING ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Monetary
policy as a technique of economic management is to bring about sustainable
economic growth and development. This has been the pursuit of nations, as
articulated by Onyewu (2012) on how money affects economic aggregates. This
view also dates back to the time of Adam Smith and later championed by the
monetary economists. Since the expositions of the role of monetary policy in
influencing macro-economic objectives like economic growth and development
which include employment generation, stability in prices, growth in Gross
Domestic Production (GDP), equilibrium in balance of payments and host of
others monetary authorities are saddled with the key responsibility of using
monetary policy to formulate and implement policies that gear toward driving
the economy on an even level.
Monetary
policy is one of the macroeconomic instruments with which nations use to manage
their economies. Monetary policy is seen as an important aspect of the
macroeconomics which deals with the use of monetary instruments designed to
regulate the value, supply and cost of money in an economy, in line with the
expected level of economic activity (Ubi, Lionel and Eyo, 2012). It covers the
gamut of measures or combination of packages intended to influence or regulate
the volume, prices as well as direction of money in the economy per unit of
time. Specifically, it permeates all the debonair efforts by the monetary
authorities to control the money supply and credits conditions for the purpose
of achieving diverse macroeconomic objectives. In Nigeria, the responsibility
for monetary policy formulation rests with the Central Bank of Nigeria (CBN)
and the Federal Ministry of Finance (FMF).
The monetary
environment in Nigeria has been very unstable in the recent past, with the
economy being vulnerable to shocks from volatile commodity prices. If the
economy slows and employment declines, policy makers will be inclined to soften
monetary policy to stimulate aggregate demand. When growth in aggregate demand
is boosted above growth in the economy's potential to produce, slack in the
economy will be absorbed and employment will return to a more sustainable path.
In contrast, if the economy is showing signs of overheating and inflation
pressures are building, the Central Bank will be inclined to counter these
pressures by tightening the economy through monetary policy to bring growth in
aggregate demand below that of the economy's potential to produce for as long
as necessary to defuse the inflationary pressures and put the economy on a path
to sustainable expansion (Anowor and Okorie, 2016).
While these
policy choices seem reasonably straightforward, monetary policy makers
routinely face certain notable uncertainties because the actual position of the
economy and growth in aggregate demand at any point in time is only partially
known as key information on variables only come with lags such that policy
makers are constraint to rely on estimates of these economic variables when
assessing the choice of appropriate policy and therefore could act on the basis
of misleading information. More so, monetary policy is not the only force
acting on output, employment, and prices. Many other factors affect aggregate
demand and aggregate supply and, consequently, the economic position of
economic units. Some of these factors can be anticipated and built into spending
and other economic decisions while others like shifts in consumer and business
confidence, posture of creditors, natural disasters, disruptions in the oil
market that reduce supply, agricultural losses, and slowdowns in productivity
growth can be totally unpredictable and influence the economy in unforeseen
ways.
In Nigeria
as in other developing countries, the objectives of monetary policy include
full employment, domestic price stability, adequate economic growth and
external sector stability. The supplementary objectives of monetary policy
include smoothening of the business cycle, prevention of financial crisis and
stabilization of long term interest rates and real exchange rate (Mishra and
Pradhan, 2008). In pursuing these objectives, the CBN recognizes the existence
of conflicts among the objectives thus necessitating at some points some sort
of trade-offs (Uchendu, 2010). The Bank manipulates the operational target
(monetary policy rate, MPR) over which it has substantial direct control to influence
the intermediate target (broad money supply, M2) which in turn impacts on the
ultimate objective of price stability and sustainable economic growth. Hence,
this study seeks to examine the effectiveness of monetary policy in stimulating
economic growth in Nigeria.
1.2 Statement of the Problem
One of the
major objectives of monetary policy in Nigeria is price stability. But despite
the various monetary regimes that have been adopted by the Central Bank of
Nigeria over the years, inflation, and unemployment still remain as major
threats to Nigeria’s economic growth. In this vein, Greenspan (2003) observed
succinctly that “uncertainty is not just an important feature of the monetary
policy landscape; it is the defining characteristic of that landscape” within
the Nigerian monetary environment, data “robousity”; data transmission
mechanism and fiscal environment are notably found as her greatest challenge
and uncertainty. This has become particularly interesting because the Nigerian
external sector (balance of payment) via change in net foreign assets;
government budget (net credit to government) influence monetary policies as
much as the real growth of the economy and prices.
Moreover,
Okorie (2009) also observed that monetary data as a component of monetary
policy proposals are often subject to frequent revision together with
non-availability and quality concerns of non-monetary data such as real sector
statistics which in turn act as retardation to monetary policies as well as
having gross implications on economic growth in Nigeria.
Fiscal
surprises have been seen to undermine monetary policy substantially, for
instance, in the event of fiscal tax surface, monetary policy is expected to
immediately become reasonable investment to maintain both internal and external
balance. From the foregoing, therefore, the study’s challenge is therefore how
best to manage the uncertainties in such way as to continue to pursue the basic
and primary function of monetary policy for efficient price stability and sustainable
economic growth.
Most of the
available studies on monetary policy in Nigeria by Celina (2014), Onyeiwu
(2012), Usman and Adejare (2014), Adigwe, Echekoba, Justus and Onyeagba (2015)
were not depth in investigation since they were theoretical studies whose
findings were subjectively influenced by leading argument in literature. It is
noted that available past studies did not give adequate attention to the link
between monetary policy and economic growth in Nigeria, as well as highlighting
effective strategies for stimulating growth in Nigeria. Hence, it was on the
identification of this gap in knowledge that this study was conceived to
critically examine theeffectiveness of monetary policy in stimulating economic
growth in Nigeria.
1.3 Objectives of the Study
The major
objective of this research study is to assess the effectiveness of monetary
policy in stimulating economic growth in Nigeria. Other specific objectives
are:
1. To examine the effectiveness of monetary
policy on price stability in Nigeria.
2. To examine the effect of money supply on the
gross domestic product (GDP) of Nigeria.
3. To examine the effect of interest rate on
the economic growth of Nigeria.
1.4 Research Questions
The study
intends to answer the following research questions:
1. What is the effect of monetary policy on
price stability in Nigeria?
2. To what extent does money supply affect
gross domestic product (GDP) of Nigeria.
3. What is the effect of interest rate on the
economic growth of Nigeria.
1.5 Research Hypotheses
Hypothesis
One
H0: Monetary policy does not have significant
effect on price stability in Nigeria.
H1: Monetary policy has significant effect on
price stability in Nigeria.
Hypothesis
Two
H0: Money supply does not have significant
effect on the on the economic growth of Nigeria.
H1: Money supply have significant effect on
the on the economic growth of Nigeria.
Hypothesis
Three
H0: Interest rate does not have significant
effect on the gross domestic product (GDP) of Nigeria.
H1: Interest rate has significant effect on
the gross domestic product (GDP) of Nigeria
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