Monetary Policy As A Tool Of Government Intervention In The Stabilization Of Price Of The Economy

Project and Seminar Material for Economics

Project and Seminar Material for Economics


Chapter One


1.0 Introduction

According to the stallion, a quarterly publication of union bank of Nigeria Plc, (anniversary edition 1998).The earliest support for establishment of the central bank of Nigeria goes back to the period of the banking failures of’ the early 1950’s following which the power of control of banking was vested on the financial secretary. Many Nationalists’ leaders at that time urged for the creation of a central bank of perform this and other traditional functions which includes the following:

  1. Float, buy and sell Government bonds and securities.
  2. To act as lender of idle resources to banks for who, the bank would also maintain reserves.
  3. To acts as financial agent for the government.
  4. Acts as a monetary authority to promote price and economic stability,
  5. To undertake currency production.

However, the ordinance for the establishment of the Central Bann of Nigeria (CBN) was passed by the House of Assembly on 17th March, 1958 and was brought partially into force in 15”‘ September when those sanctions necessary for carrying out the initial function become law. The Act was fully implemented on 1Ist July 1959 when the Central Bank of Nigeria came into full operation. The following are the main provision of the Central -Bank Act.

  1. Bankers to other banks in Nigeria.
  2. Banks and financial advisor to the Federal Government.
  3. Maintenance of external reserves in order to safeguard the international value of currency.
  4. Implementation of monetary policies to promote monetary stability and a sound financial structure.
  5. Issuance of legal tender currency in Nigeria.

1.1 Background To The Study.

As it is clearly stated in the. Bank Act listed above, one of the principle objectives in function of the Central Bank is to promote monetary stability and soundness in the financial system by implementing monetary policies

Thus, monetary policy may be said to be the combination of measure designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activity.

There are two major techniques through which monetary policy try to achieve its objectives. These are the direct in portfolio control approach and indirect market intervention approach.

The Direct control approach was introduced in the early 1960’s while the use of indirect control started in the early 1960’s, in1993 to be precise with the commencement of the open Market Operation (OMO). As pointed by Scitouslky (1969), money is a difficult concept to define, partly because it fulfils not one but three functions, each of them providing a criterion of money ness, those of a unit of account, a medium of exchange and a store of value. Therefore, he defines money as a commodity that serve as a means of valuation and of payment Le as both the unit of account and the generally acceptable medium of exchange. Thus beside legality, there are other determinants which go to makes a thing to serve as money.

Money is unique among economic goods and it is the principle of general acceptability that distinguishes it from other commodities in a modern economy.

With the introduction of money in determining the value of goods and services, the difficulties in trade by barter has been eliminated and trade made very easy. During the barter period, value of a commodity differs from one hand to the other depending in the provider of a commodity to the person in need of it. Today value is placed on items only requiring money to be paid in exchange.

Adewunmi (1996) defined price as the value attached to a particular commodity, can be described as its price. The value of a commodity is the amount of money, which can be exchanged for that commodity. In other words, the values of different commodities are shown by their prices in terms of money. The value of money therefore can be seen indirectly through the prices of goods and services. Suppose a given quantity of commodity cost #8.00 at one period and #10.00 at a later period, the different in prices of the two later periods, indicate that there is a decline in the value of money. The indicator of the value of money is thus, the general price level. A general fall in prices of commodities indicates an increase in the value of money while a general rise in prices show a decrease in the value of money.

A persistence change in price level is a characteristic of an Unstable economy. Hence an unstable economy can be said to be one that is suffering from pervasive inflation. One of the consequences of inflation in the economy is monetary breakdown as a money is losing its vale very rapidly.

This type of situation causes money to cease to function as a standard for different payment and acts as a store of value. There is therefore a need for an instrument to stabilize the value of money.

To keep the value of money stable, its quantity has to be controlled.

Monetary policy is the instrument designed to control the quantity of money in the economy.

Erizing (1972) define monetary policies as all decision and measures to influence the value of price of quantity of money and also monetary irrespective of whether their aims or objectives are monetary or non monetary and aimed at affecting the monetary system? This include policy measures which are by no means monetary.

The definition however is too wide to clearly understand the scope of monetary policy. A more precise definition exists in Johnson view; He says “Monetary policy is that policy employed, by Central Bank to control the supply and cost of money as instrument for achieving the objectives of the general economic policy. Another precise definition is that of Edward Scinpio who defined monetary policy as: the exercise of Central Bank control over money supply as a means of achieving price stability,’ rapid growth, full employment and balance in payment equilibrium.

From the above definitions, one can see that monetary policy is mainly concerned with deciding how much money the economy shall have in perhaps more correctly, deciding whether to increase or decrease the volume of purchasing power in the country if the quantity of money is deemed insufficient to keep up demand to a level that will give full employment, on inflationary policy will be adopted, that is steps will be taken to increase the quantity of money, if on the other hand it is decided to reduce the quantity of money because the demand for both commodities and labors exceeds the available supply, the deflationary policy will have to be followed in other to check an excessive rise in price.

Monetary policy are designed and implemented by monetary activities. In Nigeria, the monetary authorities consist of the presidency, the Central Bank of Nigeria and the Federal Ministry of Finance. The Central Bank of Nigeria is the Federal Ministry of Finance. The Central Bank of Nigeria is the agency, which is primarily responsible for designing monetary policy proposals for presidential approval and ensuring the implementation of the monetary policy measure accepted by the Federal Government. This is the most important activity of the Central Bank of Nigeria.


1.2 Statement Of Problems

The problem inherit in this study is to determine how monetary policy instrument can be used to stabilize price in the economy. This is because over the years, there has been upward swing and download swing of prices in the economy, which has tremendously, led to fluctuation and instability in the economy.

Therefore, the statement of problem is to determine price stability in the economy through the use of various economy monetary policy instruments such as OMO (Open Market Operation), Bank Rate, Reserve Ratio, Credit selection and Banks Recapitalization etc.


1.3 Objective Of Study

The main objective of this study, monetary policies as price stabilization instruments are:

  1. To identify the major problems of implementing monetary policy efficiently.
  2. To identify the effects of monetary policy in prices of goods and services in Nigeria, and how it influences the rate of inflation.
  3. To review the evolution or establishment of power of the central bank of Nigeria in regards to monetary policy.
  4. To identify the basic monetary policies in Nigeria.
  5. To identify how monetary policy are formulated and implemented or executed by the monetary authorities.

1.4 Research Questions / Hypothesis

  1. What is the problem of implementing the monetary policy efficiently?
  2. What is the effect of monetary policies in prices of goods and services in Nigeria?
  3. How efficient is the establishment of power of the Central Bank of Nigeria in regards to monetary policies?
  4. Identify the basic monetary polices in Nigeria.
  5. Why is monetary policy formulated and implemented by monetary authorities?

Formulation Of Hypothesis

Hypothesis I
  • H0: The yearly monetary policy guidelines are used to stabilize the general price of commodities.
  • H1: The yearly monetary policy guidelines are not used to stabilize the price of commodities.
Hypothesis 2
  • H0: Money supply has an effect on the rate of inflation in Nigeria.
  • H1: Money supply has no effect on the rate of inflation in Nigeria.

1.5 Scope Of Study

The scope of this study which is about the effect of monetary policy in the general price level of commodities in the economy. I n order to accomplish the objective of this research work, the researcher will focus in various monetary policies in the banking sector with reference to Union Bank of Nigeria P1c.

According to the monetary policy guideline of the Central Bank of Nigeria.


1.6 Significance Of Study

The study will provide exploitation and reason for Monetary policy in price stabilization. And will offer suggestions, which will avoid or minimize financial distress that may occur as a result of multiple construction of money supply. This study will reveal the determination of the bank’s solvency. And reveal the relationship between money supply and price.


1.7 Definition Of Terms

Some terms will be commonly used in the course of writing this project. These terms are:

a. Treasury Certificate:

This is also money market instrument being used to borrow for a period of 12 to 26 months.

b. Stabilization Securities:

These are issued to banks, commercial banks to create money through lending activities.

c. Monetary Policies:

These are used as a stabilization tool to check fluctuation in the level of economic activity.


1.8 Background Information On The Case Study

The Central Bank of Nigeria was established partially on the 17th March, 1958 and was brought partially into force operation on 15th September when those sections necessary for carrying out the initial functions became law. The Act was fully implemented on 1st July, 1959 when the Central Bank of Nigeria came into full operation. The following are the main provision of the Central Bank Act:

  1. Financial advisor to the Federal Government.
  2. Bankers to other banks in Nigeria.
  3. Implementation of monetary policies to promote monetary stability and sound structure.
  4. Issuance of legal tender currency in Nigeria.
  5. Maintenance of external reserves.

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