An Empirical Analysis Of The Impact Of Monetary Policy On Economic Development In Nigeria (1985–2011)

Project and Seminar Material for Economics

An Empirical Analysis Of The Impact Of Monetary Policy On Economic Development In Nigeria (1985–2011)


Abstract


One can hardly find a country without monetary policy. As a matter of fact, monetary policy has gained a solid ground in the Nigerian economy. However, in light of various economic problems in Nigeria, it would seem the benefits of monetary policy are yet to be fully harnessed. The purposed of this study is to analyse the impact of monetary policy with Nigeria being the case study. With regards to the data analysis, regression analysis was applied. The study covers the effectiveness of monetary policy from the period 1985 to 2011. The study revealed that the level of effectiveness of monetary policy is highly influenced by the Central Bank of Nigeria (CBN).


Chapter One


Introduction

1.1 Background of the Study

One of the major issues which have occupied the mind of government for years is the impact of monetary policy as a tool for price stability in Nigeria. Despite the lack consensus amongst the economy, there is remarkable strong agreement that monetary policy as an economystabilizing measure in Nigeria refers to the persistence rise in the general price level.

Monetary policy is one of the macroeconomic policies available for managing the economy. It is however important today because its effects on economic aggregates such as price, output, interest rates and exchange rates. In most countries, the central bank is saddled with the responsibility of conducting monetary policy. In the case of Nigeria, the responsibility entirely lies with the Central Bank of Nigeria (CBN). The discretionary control of the money stock by the monetary authority involves the expansion and contraction of money, influencing interest rate to make money cheaper or more expensive depending on the prevailing economic situation.


1.2 Statement of the Problem

The monetary policy implemented in the economy over the past years has been detrimental and inconsistent with developmental needs of the economy (Apata J.T, 2007). This concern has exerted pressures on the monetary authorities in Nigeria to re-examine and re-evaluate their monetary policies with the view of finding possible solutions. As a result of this, the Structural Adjustment Programme (SAP) as introduced in Nigeria in 1986 in order to correct the structural imbalances in the economy and to liberalize the financial system.

Despite various actions used by the monetary authorities in administering monetary policy in Nigeria, there are still limits to the effectiveness of monetary policy. There has been a wide discrepancy between target and outcome due to the fact that the central bank has not been able to achieve the various objectives it set out for itself. For instance, there has been a problem hitting inflation target. The inflation target in 2008 was 7% but the performance was about 19%.

Nigeria needs an effective, efficient, sound and consistent monetary policy that has a positive effect on interest rate, employment and real output, so as to minimize the economic problems disturbing Nigeria as a developing country


1.3 Research Questions

  1. What is the effect of monetary policy on price stability in Nigeria?
  2. To what extent do the instruments of monetary policy control inflation in Nigeria?
  3. What are the contributions of monetary policy towards developing Nigeria?

1.4 Objectives of the Study

This study seeks to achieve the following objectives;

  1. To determine the impact of monetary policy on inflation in Nigeria.
  2. To empirically examine the effectiveness of monetary policy on economic stability in Nigeria.
  3. To analyze the contributions of monetary policy towards promoting growth and development of the Nigerian economy.

1.5 Research Hypothesis

The hypothesis to be tested in the course of this research work is stated below;

  • H1 = Monetary policy has significant impact on inflation in Nigeria.
  • H2 = Monetary policy has no significant impact on inflation in Nigeria.

1.6 Significance of the Study

This study is significant in the following ways;

  1. It would provide an objective view of the effectiveness of the monetary policy in Nigeria.
  2. It would provide an economic basis upon which to examine the effect of monetary policy on the Nigerian economy.
  3. It would provide policy recommendations to the policy makers on ways to make the Nigeria economy vibrant through the monetary policy.

1.7 Scope of the Study / Limitation of the Study

This study will focus on major growth and development components which are vital parts of monetary policy. The study will also empirically examine the effectiveness of monetary policy in the Nigerian economy. Factors that affect smooth execution of the project include inadequate finance and short time.


Chapter Five


Summary, Recommendations and Conclusion

5.1 Summary

From the result in chapter four, the following findings were made. The findings are summarized as follows;

  1. A positive relationship exists between money supply and gross domestic product which means that money supply has a significant impact on economic growth and development. An increase in money supply promotes economic growth and development.
  2. A positive relationship exists between cash ratio and gross domestic product which means that cash ration is significant in the economy because an increase in the cash ratio will raise the gross domestic product.
  3. A negative relationship exists between liquidity ratio and gross domestic product but liquidity ratio is insignificant implying that it has a negative influence on economic growth. This is because an increase in liquidity ratio reduces the gross domestic product.

5.1 Recommendations

Due to the influence that money supply, liquidity ration and also cash ratio have on economic growth and development in Nigeria, the following recommendations are made;

  1. Both expansionary and contractionary monetary policies should be used effectively in the Nigerian economy to regulate money supply, liquidity ratio and cash ratio, which would help control inflationary and deflationary pressures.
  2. Policy makers should work hand in hand with the government in formulating, evaluating and implementing new monetary policies that will have a positive impact on the Nigerian economy.
  3. Nigerian citizens should make reports to the government and policy makers on the areas that monetary policies affect either positive or negatively. This would help the government and policy makers to be aware of the performance of monetary policies in the country.

5.3 Conclusion

In conclusion, through research work and analysis, it was discovered that monetary policy was discovered that monetary policy has a positive impact on economic growth and development in Nigeria. It was also discovered that the instruments of monetary policy have both positive and negative effects on the gross domestic product which is a measure of economic growth and development.


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