Effect Of Monetary Policy On The Growth Of The Nigerian Economy

Project and Seminar Topics with material for Banking and Finance

Project and Seminar Topics with material for Banking and Finance


This research work is dedicated to almighty God who guided me and made it possible for me to attain this educational status.


I reserve my thanks to the Almighty father who sustained and protected me throughout my life especially in this race of acquiring a bachelor Degree in economics.

My special gratitude to DR. M.N NWARO, who supervises this work and made all effort to see that this work was successful. Also special thanks to my Head of Department DR. K.G EGBULONU for his fatherly encouragement.
I also thank my parents MRS. CELESTINE and late prince RAYMOND EHIRIM OLEBARA. My brothers Obinna, Emeka, Izuchukwu and Uzoamaka and my beloved sister Ijeoma, for all the effort they made to see that I scale through.

I did not forget my spiritual father prophet Okechukwu Udochukwu for his advice throughout this time; Mr. Patrick Olebara and family, friend and other people who contributed immensely to my stay in the university. I pray that the almighty God will bless and reward them all amen.


The study shows by means of robust statistical analysis, the effect of monetary policy on the growth of Nigerian economy, using ordinary least square method. Data from 1989-2009 were examined.

The empirical analysis carried out showed that monetary policy has significant and positive impact on the growth of Nigerian economy within the period under reviews. The empirical analysis has suggests that monetary policy play a significant role in enhancing economic activities.

Table Of Content

  • Title page i
  • Certification ii
  • Dedication iii
  • Acknowledgment iv
  • Abstract v
  • Table of contents vi

Chapter One

  • 1.0 Introduction 1
  • 1.1 Background of the study 1
  • 1.2 Statement of the problem 5
  • 1.3 Objectives of the study 9
  • 1.4 Hypothesis of the study 10
  • 1.5 Significance of the study 11
  • 1.6 Scope and Limitations of the study 12
  • 1.7 Definition of terms 13
  • Reference 16

Chapter Two

  • 2.0 Literature Review 17
  • 2.1 Introduction 17
  • 2.2 Concept of Monetary Policy 18
  • 2.3 Economic Growth 21
  • 2.4 Monetary Policy Objectives and Economic Growth 23
  • 2.5 Monetary policy instruments 30
  • 2.6 Placement of Government Deposits 43
  • 2.7 Transmission Mechanism 44
  • 2.8 Analysis of Key Policy Objectives/Economics Indication 45
  • 2.9 Theories of Monetary Policy 54
  • 2.10 Effectiveness of monetary policy using the IS-LC frame work 58
  • 2.10(1) Credit Availability Theory 63
  • Reference 65

Chapter Three

  • 3.0 Research Methodology 67
  • 3.1 Introduction 67
  • 3.2 Restatement of research hypothesis 68
  • 3.3 Sources of data 68
  • 3.4 Method of data analysis 69
  • 3.5 Model specification 72
  • 3.6 Limitations of the study 74
  • Reference 75

Chapter Four

  • 4.0 Presentation and Analysis of Data 76
  • 4.1 Data presentation for Regression 76
  • 4.2 Test of Significant of the Parameter Estimates 79
  • 4.3 Findings 84
  • Reference 86

Chapter Five

  • 5.0 Summary of Findings, Conclusions and policy Recommendation 87
  • 5.1 Summary of findings 87
  • 5.2 Conclusion 88
  • 5.3 Policy recommendation 89
  • 5.4 Suggestions for further study 91
  • Bibliography

Chapter One

1.0 Introduction

1.1 Background Of The Study

If is universally conventional that modern economics grow efficiently with the support of good and efficient use of fiscal, monetary, banking, external and real sector policies.

Thus success in managing macrocosmic affairs therefore implies that these polices should be harmonized and made to complement each other in effect of momentary policy measures are one of the most commonly employed measures of achieving macroeconomic stabilities and general economic growth in an economy.

As is usual in many other economics, monetary policy in Nigeria entails the control of money supply and interest rate in the economy in pursuit of some pre-identified national objectives.

Nigeria as a country stranded experiencing decline in productivity since after the civil war in 1970. During this period, there was rapid increase in inflationary pressure and this resulted in the deterioration of the gross domestic product (GDP), which was worsened by decline in production. After the oil boom period in 1974, during the military regime, of Gowon, the gross domestic product (GDP) of the economy recorded a positive trend. As a result of this, money supply increased and this was succeeded by an increase in general price level. Not withstanding, money is very significant in any given economy, be it develop, developing and under developed economic variables such as gross national income, charges in general price level, capital flow of balance of payment, economic growth and other key factors of the economy.

A review of monetary development showed that money stock measured by broad money (m2) grew rapidly and encompassed sharp increase in narrow money (m1), which has been used largely as a target variable.

Accordingly, narrow money rose by 8.7 percent against a target of 6.5 percent in 1985 and recorded the negative with of minus 4.5 percent in 1986, then increased by 17.1 percent in 1987, when the target growth was 11.8 percent.
However, in 1988, money stock rose by 42.3 percent against the target of 15.0 percent and by 1990 the growth rate m1 (narrow money) had exceeded target very significantly and this become worrisome to the authorities concerned.
Efforts made to reverse the trend in 1995 yielded good result leading to a growth figure of 10.1 percent for broad money (M2) and 8.1 percent for narrow money (M1). In 1996, broad money (M1) showed a growth rate of 23.8 percent against a target of 16.5 percent while narrow money (mi) showed a growth rate of 19.9 percent against a target of 14.5 percent. (CBN Annual Report December, 1997:14).

The effect of monetary policy measures on output and price through the transmission mechanism necessitates a careful approach to the formulation and implementation of these measures in the economy. The stability of an economy opens a door to material prosperity through increased investment, and thus increased output. The domestic production of an economy is a measure of economy’s activities and determines also the welfare of the citizenry and also growth in that economy.

The gross domestic product (GDP) of a country can be described as the market value of the final domestic production during a given year. In Nigeria, total G.D.P stood at N71, 075.9 million in 1989 with agriculture contributing the least figure of only N104.4 million.

However by 1986, the total GDP increases to N83, 495.2 million with agriculture contributing a huge figure of N26,072,6 million and communication making the least contribution of N25.2 million, GDP amounted to N106870.0 million with agriculture contributing the least to this figure with N300.0 million in 1996 and has kept increasing till date (CBN statistical target Bulletin 1996:4).

The main target of every country especially 3rd world countries like Nigeria is to achieve industrial growth and rapid development it therefore makes sense to gear all our efforts towards achieving this goal by making optimal use of all available tools at our disposal. This is the reason why the use of well formulated and skillful implemented monetary policy measures are needed in order to increase productivity needed to achieve growth in the economy.

More so, it will enhance the level of employment and production capacity in the economy.

1.2 Statement Of Problem

In terms of human welfare and efficient operation of the economy, it is important to seek improved policies and stronger institutional framework. Factors like the neglect of agriculture as the main source of non-oil export, fluctuations in crude oil price level, neglect of the manufacturing sector, instability in general price local and inadequate government policies have contributed to the continuous decline in gross domestic product (GDP) of the economy over the years.

The decrease in productivity level of Nigeria can be traced back to oil boom era (1970-1979) when government was financing the economy through budget deficit. This period was characterized by facial dominance and severe macroeconomic imbalance. The main expansionary factor was the magnetization of foreign exchange receipt from crude oil exports inline with the rapid growth in bank credit to government of the preceding years.

The absence of mechanism for sterilizing the proceeds of excessive earning from crude oil export resulted in inflationary pressure with the rate reading 33.9 percent in 1975 compared with 13.4 percent of the preceding year. Importation of goods was liberalized resulting in massive importation of food, raw materials, and other consume and manufacturing items.

The federal government stinted embedding on unnecessary expenditures in response to the gain flow higher crude oil prices. And as a result of that the federal government could not respond to the need to contrast to decline. By 1976, fiscal operations began to record deficit whereas the acierated growth in money supply in 1970-1974 was attributed to magnetization of crude oil export carryings through government spending.

Monetary authorities and management in Nigeria have adopted both direct and indirect instrument to influences the level of economic activities by regulating the supply and cost of money at optimum level of economic activities by regulating the supply and cost of money at optimum level that will ensure the attainment of desired national economic objective, which economic growth is inclusive. The problem or question is what may be expected from the monetary policy of the C.B.N in terms of support for growth. Here, it would seem that some observers still live in the “era of great expectations” were adopted in order to stimulate domestic demand, while neglecting their adverse consequences for price stability.

Society has paid a high price for this illusion in terms of stagnating economic growth combined with high and volatile inflation. Hence we are faced with the problem of what contribution that monetary policy can make towards balanced growth and the failure of our government to support monetary policy by sound budgetary policies and wage developments in line with productivity growth in other words the overall policy mix must be appropriate, without acquits support from other policy areas, the CBN may be forced to take measures in the fight against inflation which entails a short-term loss in out put and employment, this might have adverse consequences for the publics opinion of monetary policy.

Given that it is a weal-known fact that effects of monetary policy occur with long and variable lags. For this reason, it is difficult, if not impossible to use it for fine-truing purposes. Again a sustainable economic growth requires more than just an appropriate monetary policy, but also stronger institutional support.

It is therefore left for the monetary authorities and government officials to adopt monetary policy measures that is adequate, so that through its took, economic growth can be achieved by allocating the resources to the proffered sectors of the economy.

1.3 Objectives Of The Study

The general objective of the study is to determine the effect which monetary policy has on the economic growth of the Nigeria economy.

But specifically speaking, the objective of this study includes the following.

  1. To vet the effectiveness of the monetary policy techniques and instruments employed by the government and monetary authorities for economic growth in Nigeria.
  2. To understand the conduct of monetary policy in Nigeria and also describe the major instrument in use in Nigeria.
  3. To investigate the relationship between money supplies and gross domestic product (GDP) of Nigeria.
  4. To determine or investigate the level of power which the monetary instruments have.
  5. To ascertain the importance of gross domestic product (GDP) in determining the level of growth in the economy.

1.4 Hypothesis Of The Study

Hypotheses are research solution to problems which are essence guesses or uncles that are subjected to some verification or test. By the above assertion, the researcher therefore demand it necessary to establish the following hypothesis that.

HO: money supply (M1) makes no effect on gross domestic product (GDP) of Nigeria.
HI: money supply (M1) makes an effect on gross domestic product (GDP) OF Nigeria.

H0: money supply (M2) makes no effect on gross domestic product (GDP) of Nigeria.
H1: money supply (M2) affects gross domestic product (GDP) of Nigeria

1.5 Significance Of The Study

The importance or relevance of this study is to determine how economic growth can be enlaced through the selective manipulation of monetary policy instruments.

Economic growth proceeds socials development and welfare of citizens are large effectiveness of monetary policy should be maintained in order to maintain a stable growth in the economy. The main problem of this country has been huge external debts and high rate of inflation incurred by government as a result of adopting budget deficit as its main source of financing. This has resulted in macroeconomic disequilibrium and decline in the standard of living of the people. Therefore apart from benefiting the government in the smooth running of the economy and the citizens in increasing their welfare, this study is also necessary for,

  1. It contributes to academic wealth of knowledge and understanding.
  2. It tries to surface some easy neglected attributes of our monetary policy actions.
  3. Finally, it tries to sensitize on the need for research work and furthering of understanding especially in matters relating to macroeconomic management and national welfare.

1.6 Scope And Limitation Of The Study

Through Nigeria’s economic growth problems since 1970s, this research work will cover a period of twenty one year (1989-2009). Here the levels of growth in money supply (m1 and m2) and Gross Domestic Product (GDP) will be examined money supply as a major variable of monetary policy and its on the gross domestic product (GDP) form the scope of this study.

The basic limitations occurred in the process of collection of data and other relevant materials for the study. The inaccessibility of enough research materials acted, as a constraint on the size and degree of variables for the model built. Figures of the subject from CBN were mostly irregular and inconsistent. Also lack of time due to the university academic calendar and shortage of finds hampered the elaboration of the study.

Effect Of Monetary Policy On The Growth Of The Nigerian Economy

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