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Monetary Policy Measures As Instrument Of Economic Stabilization In Nigeria

Monetary Policy Measures As Instrument Of Economic Stabilization In Nigeria

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Monetary policy usually involve the expansion or contraction of money supply the manipulation of interest rates to make borrowing easier and cheaper or more difficult and deicer depending an prevailing economic condition and challenging of fund to growth sector for increased output. Monetary policy is an integral part of the overall economic policy that regulate the level of money or liquidity in the economy in order achieve some desired policy objective.

Monetary policy is usually the responsibility of the monetary authorities which comprises the central bank and the federal government. In Nigeria the central bank exercise primary responsibilities for initiating articulating implementing and appraising such policy the banks proposal are subject to ratification by the federal governments.

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

In the application of monetary policy measures as instrument of economic stabilization and instrument of monetary policy are determined by the nature of the problems to the solved and by the environment in which these problems exist.

There are broadly two categories of these instruments namely indirect or market based and direct instrument indirect instrument are usually used in market based economics where the quantity of money stock can be effected through the relationship between money supply and reserve money as well s the ability of the monetary authority to influence the creation of reserves. The reserves and money supply can be affected through the following ways:

Change in reserves/ deposit ration
Change in discount rate
Interest arte change
Engaging in open market operations (OMO)
In an under developed financial environment the instrument of monetary management are largely limited of direct measure which set monetary and credit targets ate desired level. The major direct control measures is direct interest regulation however quantitative ceiling or overall credit operation is also used.

The instrument of monetary policy are applied in the achievement of various objective. However all such objective are in consonance with the board objective of he first national rolling plan 1990-1992 which are the consolidation of the achievement made so far in the implementation of the structural adjustment programme (SAP). The plan is also to deed with pressing problem of inflation particularly manufacturing and the inadequate availability of foreign exchange with the aim of achieving higher level of overall capacity utilization. It hopes also to address the issue of low growth of non-oil exports other socio economic problem to be addressed by the plan include the high growth rate of population threats to the environment an the manager of anti-social behavious such as armed robbery.

These broad objective can be broken down to more direct objective namely. A high level of employment price stability a sustainable level of economic growth effectiveness of monetary policy measures against which background of objective they were formulated has raised serious doubts as to the continuous use of these policy measures.

It is in the light of the above theoretical background that the author/ writer wishes to carry out a study of monetary policy measures as an instrument of economic stabilization.

1.2 STATEMENT OF THE PROBLEM

Over the years so may instrument of monetary policy have been in vogue not only to gear up the level of investment but to cheek the perennial problems of unemployment prices level instability lack of sustainable economic growth balance of payment disequilibria imbruing to mobilize domestic saving a out put these level consistently and persistently done severe damage to the Nigeria economy but most strikingly these problem have continued to plagues the economy unabated.

It is against this background that the problems of this study have been identified and they are as follow.

Are monetary policy measures effective as instrument of economic stabilization?
Have there been any significant variation in the use of monetary policy to achieve desired objective and what has been the outcome
Is the implementation of monetary policy ideal
Could there by any remedy to these problem and family.
Are there conduits or relationship between monetary policy and fiscal policy measures

1.3 OBJECTIVE OF THE STUDY

In many parts of the world the objective of monetary policy today have transcended the traditional function of maintaining a stable exchange rate and avoiding business cycles. Explicitly government seek to use monetary policy as an aid in the growth of output income and employment maintenance of stable domestic prices level ands the strengthening of payment Nigeria monetary police since independence has been geed towards the following objective of this project which involve the following.

To prevent and analysis the various monetary objective and instrument for the period.
To demonstrate the general trend in monetary policy as a tool achieving economic stabilization in Nigeria.
To ascertain the level of successes of policy measures against desired objective.
To identify the factor that trend to hinder the full attainment of the desire objective
To recommend the appropriate policy measures for the achievement of specific objective as well as recommend solutions to problem that hinder the full attainment of such objectives.

1.4 RESEARCH HYPOTHESIS

Hypotheses are testable tentative and problem explanation of the relationship between two or more variable the credit a state of affairs of phenomenon. It may be reviewed as a conjectural proposition an informed intelligent guess about the solution to a problem the researcher therefore deemed it necessary to establish the following hypotheses that.

1. Ho: A reduction in money supply has led to a current account surplus

in the balance of payment

Hi: A reduction in money supply has not led to a current account surplus in the balance of payment

2. Ho: Increase in net domestic credit has led to an increase in GDP

growth rate

Hi: Increase in net domestic credit has not led to an increase in GDP

growth arte

1.5 SIGNIFICANCE OF THE STUDY

This study should be of immense importance to all the financial studies student. The accounting student need this study for their continuous learning while other department need it for the understanding of monetary policy. It can also be of invaluable use to the following.

To the student it will provide a complement to the few existing texts on monetary policy and economic stabilization.
To researcher it will serves as a valuable sources of data.
To the policy maker it highlights the mechanism for the operation of monetary policy against achieving set goal and objective it also analyze and suggest solution to the problem facing the full implement to monetary policy measures.
To the investors it serves as a guideline o the effect of monetary policy on various sector of the economy in which their funds can be invested and finally.
The study of monetary policy helps the bankers in analyzing the effect of government action on their activities and whether these action are on the whole favourable.

1.5 SCOPE AND LIMITATION OF THE STUDY

The limitation of this study can be emphasized by the following:

Measurement of economic stability it show where one economic indicator may fall within the deal range because of the result of the fact while other do not. It become difficult to say accurately and conclusively that he economy is stable.

The restriction of data pertaining to certain sector of the economy. It therefore become difficult to assess the impact of monetary policy on such sector.

i. The erratic nature of government in Nigeria there is a great deal of instability in government therefore economic policy of which monetary policy is one is never stable. It makes the implementation of monetary policy faulty because it keep changing with the advent of each new government.

ii. The mobility of the monetary authority to provide adequate statistics on the performance of monetary policy measure adopted by them. this is largely due to the problems of ulegal actions of the citizen who attempt to thwart the efforts of the monetary

1.6 DEFINITION OF TERMS

Economic stabilization:

It is the maintenance of a relatively stable and favouarble level for all the economic indicators.

Macro- economic:

It is the branch of economic that deals with the study of the economy as a whole. It studies to the problem.

Monetary policy:

The combination of measure designed to regulate the supply of money to an economy.

Money stock:

The amount of money in circulation at any profit in time This is variable and could be affected.

Reserve money:

It is the amount of funds a bank is required to maintain in the vaults.

Reserve ratio:

Its ratio of the deposit that the banks are required to maintain with the central bank.

Discount rate:

It is the rate at which the central bank lends money to commercial banks discount house or other financial institution.

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