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The Effect of Monetary Policy on Economic Growth in Nigeria (1981-2014)

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The Effect of Monetary Policy on in Nigeria

ABSTRACT

The purpose of this project is based on the effect of on economic growth in Nigeria. This work discussed the meaning of as monetary management techniques put in place by the government through the central bank to control money stock in order to influence broad macro-economic objectives. The data used is a secondary data collected from central bank of Nigeria statistical bulletin between the periods of 1981 to 2014, and multiple regression analysis of ordinary least square (OLS) were used. The variables of the model includes: GDP Growth as the dependent variable and broad money supply, interest rate, and rate as the independent variables. The result shows that money supply is statistically significant, which means that money supply influences growth positively in Nigeria. On the other hand, interest rate and rate are statistically insignificant showing that interest rate and rate are negatively influences economic growth in Nigeria. Government should increase its expenditure on productive sectors to boast economic growth alongside with .

CHAPTER ONE

INTRODUCTION

1.1 Background Information

Monetary policy are monetary management techniques put in place by the government through the central bank to control money stock that is supply of money in order to influence broad macro-economic objectives which include price stability, high level of employment, sustainable economic growth and balance of payment equilibrium. These broad objectives are achieved through the use of appropriate instruments, depending on which objective the policy formulated want to achieve on the level of development of the country.

Over the years, the major goals of have often been the two later objectives namely: Inflation targeting and exchange rate policy. These objectives have dominated the Central Bank of Nigerian’s focus based on the assumption that these are essential tools of achieving macroeconomic stability (Ajayi, 1999). The role of the Central Bank of Nigeria in controlling the has facilitated the emergency of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and in value becoming a prominent earning asset for investors and source of balancing liquidity in the market. The two fundamental goals of are to promote maximum sustainability output and employment and to maintain sustainable price level in the economy, by so doing, the Central Bank has to checkmate the economy in the short run and in the long run, comparing the estimates to its goal for the output and price stability. If there be a gap between the estimates and the goals, the Central Bank of Nigeria has to embark on contractionary or expansionary measures to tackle the problems observed (Chimezie, 2012).

Monetary policy in Nigeria was implemented in the Central Bank of Nigeria (CBN) act of 1958. This act mandated the bank to promote and maintain monetary stability and a sound financial system in Nigeria. The Central Bank of Nigeria (CBN) pursue price stability and sustainable economic growth objectives which includes the attainment of full employment, stability in the long term interest rate and pursuing optimal exchange rate.

The Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a Central Bank of any country which is the regulation of the stock of money in such as to promote the social welfare (Ajayi, 1999). This role is anchored on the use of that is usually targeted towards the achievement of full employment equilibrium, rapid economic growth, price stability and external balance.

In the application of as instruments of economic growth, these instruments are determined by the nature of the problems to be solved and by the environment in which these problems exist. There are broadly two categories of these viz, quantitative or indirect controls and selective (qualitative or direct) controls. Indirect instruments are usually used in market based economic where the quantity of money in stock can be affected through the relationship between money supply and reserve money as well as the ability of monetary authority to influence the creation of reserves and hence, money supply can be affected through the following ways:

1. Change in discount rate

2. Change in reserve deposit ratio

3. Interest rate change and

4. Engaging in open market operation

In an under-developed financial environment, the implementation of monetary and credit targets at desired levels are not effective. The major direct control is direct interest regulation. Hence, the regulatory authorities interpose explicit limitations on dealings between borrowers and creditors.

However, the effectiveness of monetary policies against this background of objectives formulated has raised serious doubts as to the continuous use of this policy. It is in the light of the above background that the researcher wishes to carry out the study on the effect of on economic growth in Nigeria.

1.2 Statement of Research Problem

Monetary policy has been operated with the variety of objectives in mind over the years. However, it appears that the objectives generally boil down to adjusting the supply of money in the economy to achieve some combination of inflation and output stability. Perhaps, it is also the reason why the policy objectives of the Central Bank of Nigeria (CBN) and its thrusts are essentially the attainment of price stability and sustainable economic growth. Associated objectives are those of full employment, stable long term interest rates and real exchange rates. Although the focus of has shifted largely in favour of price stability, especially with the adoption of inflation targeting in 2008, the monetary authority acknowledges the need to create a balance with the other macroeconomic objectives of the government.

Nevertheless, considering the recent slowdown in economic growth, the price stability objective of the Central Bank of Nigeria (CBN) and the consequent high benchmark interest rate over the last three years may have started to hurt the Nigerian economy. Hence, it is on this note that this research seeks to find the answers to the following problems:

1. What are the effects of on economic growth in Nigeria?

2. How effective is the interest rate impact on economic growth in Nigeria?

1.3 Objectives of the Study

The broad objective of the study is to ascertain the effect of on economic growth in Nigeria. However, the following are the specific objectives:

1. To determine the effect of on economic growth in Nigeria.

2. To empirically investigate if interest rate has any impact on economic growth in Nigeria.

1.4 Research Hypotheses

The hypotheses to be tested in the course of this research work are:

H0: Monetary policy instrument does not impact significantly on the economic growth of Nigeria.

H0: Interest rate does not have a significant effect on economic growth in Nigeria.

1.5 Significance of the Study

The following are the expected relevance of the study:

The stakeholders, Government and monetary institutions will use the outcome of this study in making decisions relating to by serving as a guide in regulating price stability and other policies in order to achieve monetary stability in Nigeria.

Researchers will find this study useful as a reference point on similar topics.

The advancement of economic theory:

This study will fill the gap in literature although a lot of researches have been done on this topic.

It would provide an objective view of the effectiveness of in Nigeria.

The study would also provide an econometric basis upon which to examine the effect of on the Nigerian economy.

1.6 Scope of the Study

The economy is a large component with lot of diverse sectors. The empirical investigation of the effect of the on the economic growth in Nigeria shall be restricted to the period between 1981 and 2014.

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