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1.0     Introduction

1.1     Background of the Study 

Monetary policies are pursued to control inflationary trends by maintaining price stability, achieve and promote full employment and achieve positive economic growth. In pursuing its monetary policies, the Central Bank of a country can use various tools which include open market operations (sale and repurchase of government securities), placing ceiling on bank lending and raising the reserve requirements”.

According to Ibitoye & Ajayi (2011), Monetary policy function of the Central Bank is centered on maintaining monetary and sound financial system in Nigeria. The objective of this function is to control the money supply as instrument for achieving the objectives of general economic policy. To maintain a desired economic growth and stability, there is need to regulate money supply and the cost and availability of credit in the economy. Thus, the Central Bank of Nigeria has a major role of managing and regulating the currency and credit system in Nigeria to avoid either too much money or too little money in circulation. An effective management and regulation of credit control will:

(i)      Ensure relative price stability.

(ii)     Curb unemployment of resources and

(iii)    Ensure a healthy balance of payment position of the country.

From the above, it can be seen that one of the main objectives of monetary policy is to combat inflation. Monetary policy is the use of the instrument the disposal of the monetary authority to influence the availability and cost of credit/money with the ultimate objective of achieving price stability. Depending on the mandate of the authorities, the objectives on monetary policy may well go beyond price stability. More often than not, the monetary authorities particularly in developing countries are saddled with a dual mandate of price stability and sustainable growth. In such a situation, monetary policy lends itself to use for the attainment of both objectives.

Monetary policy influences the level of money stock and or interest rate. ie availability, value and cost of credit in consonance with the level of economic activity. Macroeconomic aggregates such as output employment and prices are, in turn, affected by the stance of monetary policy through a number of ways including interest rate, or money, credit, wealth or portfolio and exchange rate channels (Akhtar. 2007, Pass et al CBN 2011). The monetary authorities apply their discretionary power of influencing the money stock and interest rate to make money more either more expensive or cheaper depending on the prevailing economic conditions and policy stance in order to achieve price stability. This is why Wrightzman (1976) concludes that monetary policy is nothing but a deliberate attempt to control the monetary supply and credit conditions for the purpose of achieving certain broad economic objectives. In general most monetary authorities or Central Banks have been saddled with controlling inflation, maintaining a healthy balance of payments position to safeguard the external value of the domestic currency and promoting economic growth.

In Nigeria the Central Bank of Nigeria (CBN) is the sole monetary authority. Its core mandate is to promote monetary stability and evolve an efficient and reliable financial system through the application of appropriate monetary policy instruments and systemic surveillance. The 958 Act establishing the CB\ gives it the following specific functions (which has endured the 2OD CBN Act):

-        Issuance of legal currency notes and coins in Nigeria.

-        Maintenance of Nigeria’s external reserves

-        Safeguarding the international value of the currency.

-        Promotion and maintenance of monetary stability and a sound and efficient financial system in Nigeria and

-        Acting as banker and financial adviser to the Federal Government.

Embodied in these objectives are two separate but highly related roles: developmental role and financial surveillance (stability) role. The roles demand, among others, that the CBN focuses n both price stability and growth. In order to ensure the realization of goals of price stability an economic growth, the CBN deploys its monetary policy instruments in such a way as to ensure optimality in inflation and growth outcomes.

It follows therefore that efficient conduct of monetary policy is a major responsibility of the Central Bank of Nigeria. This is also true of most monetary authorities.

Monetary policy influence the volume and direction of purchasing power in an economy and is an instrument of market intervention to achieve rationality stipulated objectives which otherwise will be impossibly attained at least in terms of volume, speed and direction (Anyanwu, 1996).

As the watchdog of the economy, the Central Bank has the duty to ensure that policies are not set in motion to ensure that the monetary system and the real system move hand in hand and that monetary variables do not constitute hindrance in the achievement of national objectives. The level of monetary supply in the economy must not be too high as to be capable of creating inflation and must not be too low as to hinder investment. If the monetary sector is not controlled in line with changes in the real system a situation of disequilibrium will occur. creating problems in the economy.

Monetary policy in the economy is made up of six components or different policies dealing with the volume of or quantity of, money i.e. the supply of money and credit, its price the rate of interest and its allocation (Afolabi, 2011). It also includes policies on balance of payments, the exchange rates and external reserve management. In other words, monetary policy that limits itself merely to establishing and controlling the quantity of money or its price or indeed omits or excludes any of the six components is not complete and cannot be effective.

Generally, the objectives of monetary policy include full employment, rapid economic development, and maintenance of price stability and balance of payments equilibrium (Folawewo and Osinubi, 2006). In Nigeria the overriding aim of her development efforts remains that of bringing about improvement in the living conditions of her people. In recent years, there has been a growing recognition in many countries of the important contributions, which an effective Central Bank can make to enhance economic performance. Although. Central Banking activities are diversified and have evolved overtime, it is through the conduct of monetary policy that it makes its most pervasive impact on an economy. More specifically, a Central Bank has a significant impact on a broad range of Macroeconomic variables including output growth, employment, inflation, interest rates, exchange rates and the balance of payments. It is on this background that this study would examine the trend and structure as well as investigate the impact of the monetary policy on macro economic variables 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 instruments that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s economic growth.

Nigeria has experienced high volatility in inflation rates. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent (CBN. 2009). The growth of money supply is correlated with the high inflation episodes because monetary was often in excess of real economic growth. However, preceding the growth in money some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade.

Structural factors have proven to be important in the inflation spiral. Reduction in oil revenue (a supply shock) led to a reduction in real income, with serious distributional implications. As workers pushed for higher nominal wages, while producers increased mark-ups on costs, an inflationary spiral followed. In addition to these factors the government also had a transfer problem in order to meet debt obligations.

The failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of development has been very poor. In marked contrast to most developing countries, its GDP was not significantly higher in the year 2000 than it was 35 years before. As many economic indicators show. Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-2.7 in 1982. 7.1 in 1983 and -1.1 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986 and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of- 0.8% was recorded, 1990s witnessed an unstable growth. However, the growth rare has been relatively high since 2001. An examination of the long-term pattern re’ cais the following secular swings: 1965-1968 Rapid Decline (civil war ‘ears), 1969-1971 Revival, 1972-1980 Boom. 1981- 1984 Crash, 1985-1991 Renewed Growth, 1992-2010 Wobbling (CBN, 2010).

The main thrust of this study shall be to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go a long way in assessing the extent to which the monetary policies have impacted on the growth process of Nigeria using the major objectives of monetary policy as yardstick.


1.3     Objectives of the Study

         The main objective of this study is to assess the effectiveness to the monetary policy instruments in Nigeria. However, the following specific objectives would be achieved.

i)              To examine the relationship between gross domestic product and monetary policy instruments in Nigeria.

ii)             To examine the relationship between gross domestic product and lending rate in Nigeria.

iii)           To examine the impact of money supply on gross domestic product in Nigeria.

iv)           To examine the impact of exchange rate in gross credit and gross domestic product in Nigeria.


1.4     Research questions

The following research questions are very important to the actualization of this study.

  1. How does gross domestic product relate with monetary policy instruments in Nigeria?
  2. To what extent does lending rate impact on gross domestic product in Nigeria?
  3. How does money supply impact on gross domestic product in Nigeria?
  4. To what extent does exchange rate relate with gross domestic product in Nigeria?
  5. To what extend does domestic credit impact on gross domestic product in Nigeria?


1.5     Statement of Hypotheses 

The following hypotheses are stated in the course of this study.

Ho1:   There is no significant relationship between gross domestic product and monetary policy instrument in Nigeria.

Ho2:   There is no significant relationship between gross domestic product and lending rate in Nigeria.

Ho3:   There is no significant relationship between gross domestic product and money supply in Nigeria.

Ho4:   There is no significant relationship between gross domestic product and exchange rate in Nigeria.

Ho5:   There is no significant relationship between gross domestic product and domestic credit in Nigeria.

1.6     Scope of the Study

The economy is a large component with a lot of diverse and sometimes complex parts. This study will focs on some selected monetary policy instruments such as domestic credit (CR). Lending Rate (LR), Money Supply (MS) and Foreign Exchange Rate (FER). This study will over all facets investigate the effect of the major ones (instruments). The empirical instruments on growth of Nigeria economy shall be restricted to the period between 1985 and 2015.


1.7     Significance of the Study