Impact Of Monetary Policy Measures As An Instrument Of Economic Stabilization
Monetary policy measures, as pivotal tools for economic stabilization, wield significant influence on various facets of an economy, particularly in managing inflation, stimulating growth, and maintaining stability. Through mechanisms such as interest rate adjustments, open market operations, and reserve requirements, central banks aim to regulate the supply of money and credit in the economy. By targeting inflation rates and influencing aggregate demand, these measures can effectively mitigate economic fluctuations and steer the economy towards equilibrium. Additionally, monetary policy impacts investment decisions, consumer spending patterns, and exchange rates, thereby affecting overall economic activity and employment levels. However, the efficacy of such measures depends on a multitude of factors, including the prevailing economic conditions, policy credibility, and the transmission mechanism’s efficiency. Therefore, continuous evaluation and fine-tuning of monetary policy strategies are imperative to ensure their effectiveness in fostering sustainable economic growth and stability while addressing evolving macroeconomic challenges.
The study examined the impact of monetary policy in stabilizing the Nigeria economy. In the model specified inflation is the regress while cash research requirement, liquidity ratio, money supply, minimum rediscount rate, interest rate are the regressors. The government employs a deliberate manipulation of cost and availability of credit and money to achieve this economic objective. The CBN being the sole regulatory body combines measures designed to regulate the value, supply and cost of money into economic activities. This is what we call monetary policy (CBN Brief 1996/03). It is against this background that the research is carried out to ascertain the effect in the use of monetary policies such as money supply, interest rate, liquidity ratio, minimum rediscount rate, inflation rate and cash reserve requirement to stabilize the Nigeria economy. Also to determine the relationship that exists between the independent variables and dependent variable from the secondary data for the period under study (1980 – 2010). The statistical technique that will be used for this analysis is the ordinary least square technique, with the aid of PC five 8.00 software package. It has been identified that the major problem militating against the poor performance of monetary policy instruments in stabilizing the economic in Nigeria is time – lags which involves policy employed to take many months to achieve its full effects. This research recommends that there should be a reduction in the cost of production and increase the exportation in order to achieve the objectives of naira devaluation in Nigeria and also, central banks should be independent and should be able to achieve its inflation targets and the stabilization of growth rate in money supply.
Title Page
Certification Page
Dedication
Acknowledgement
Abstract
Table Of Contents
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
1.2 Statement Of Problem
1.3 Statement Of Objectives
1.4 Statement Of Hypothesis
1.5 Significance Of The Study
1.6 Scope And Limitation Of The Study
1.7 Definition Of Terms
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1.0 Theoretical Literature
2.1.1 The Keynesian View On Monetary Policy
2.1.2 The Classical View On Monetary
2.1.3 The Monetarist View Of Monetary Policy
2.2.0 Meaning, Instruments And Objectives Of Monetary Policy
2.2.1 Instruments Of Monetary Policy
2.2.2 Open Market Operation (Omo)
2.2.3 Reserve Requirement Ration
2.2.4 Discount Rate
2.2.5 Selective Credit Controls
2.2.6 Moral Suasion
2.3.0 Objectives Of Monetary Policy
2.4.0 Monetary Policy Indicators
2.5.0 Monetary Policy Targets And Implication To The Nigerian Economy
2.6.0 Factors That Have Militated Against The Impact Of Monetary Policy In Nigeria
2.6.1 Instability Of The Financial Sector
2.6.2 Poor State Of Economic Infrastructure
2.6.3 Non-Harmonization Of Monetary And Fiscal Policy
2.6.4 Increase In Government Expenditure
2.6.5 Equate Rate Bank
2.7.0 The Impact Of Monetary Policy During The Depression Era Of Structural Adjustment Programme (Sap)
2.8.0 Debt Management As An Integrated Part Of Monetary Policy
2.9.0 The Impact Of Monetary Policy On The Economy
2.10.0 Economic Stabilization
2.11.0 Empirical Literature Review
CHAPTER THREE
3.0 METHODOLOGY
3.1 Theoretical Framework
3.2 Estimation Procedure
3.3 Model Specification
3.4 Method Of Evaluation
3.5 Data Required And Sources
3.6 Decision Rule
CHAPTER FOUR
4.0 PRESENTATION OF ANALYSIS OF RESULT
4.1 Presentation Of Regression Result
4.2 Result Interpretation
4.2.1 Evaluation Based On Economic Criteria
4.2.2 Statistical Test (First Order Test)
4.2.3 Econometrics Test (Second Order Test)
CHAPTER FIVE
5.0 SUMMARY, RECOMMENDATIONS AND CONCLUSION
5.1 Summary Of Findings
5.2 Recommendations
5.3 Conclusion
Bibliography
Appendix
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Monetary policy is the process by which monetary authority of a country controls the supply of the money that is monetary stock often targeting a rate of interest for the purpose of promoting economic growth and stability.
Monetary policy measures are monetary management put in place by the government through the central bank. These measures rely on the control of monetary stocks, that is supply of money in order to influence board macro- economic objectives which includes price stability, high level of em*loyment sustainable economic growth and balance of payment equilibrium. These board objectives are achieved through the use of appropriate instrument depending on which objective the policy formulated want to achieved and also on the level of development on the economy.
In the application of monetary policy measures as instrument of stabilization, instrument of monetary policy are determined by the nature of the problems to be solved and by this environment in which these problems exist. They are broadly two categories of these instruments VIZ- indirect and direct instruments. INDIRECT INSTRUMENT are usually used in the market based on economic where the quality of money stock can affected through the relationship between supply and resume money as well as the ability of the monetary authority to influence the creation of reserved.
The reserved and hence money supply can be affected through the following ways.
1. Deposit ratio/change in reserve.
2. Change in discount rate.
3. Interest rate change.
4. Engaging in an open market operation.
In an underdeveloped financial institution the instrument of monetary management is largely limited to direct measure which set monetary and credit target at desired levels. The major DIRECT control measure is direct investment
regulation however quantitative ceiling on overall credit operation is also used. These instruments of monetary policy are applied in the achievement of varied objectives.
1.2 STATEMENT OF THE PROBLEMS
The Nigeria economy has encountered the problem of disequilibrium, inability to mobilize domestic savings and unsatisfactory expansion of domestic output. These problems have consistently and presently done severe damage to Nigeria economy; but most strikingly these problems have continued to play the economy unabated that is, the economy is becoming less strong. It is against the background that the problem of this study has been identified and they are as follows.
1. Are monetary policy measures effective as instrument of economic stabilization?
1.3 STATEMENT OF OBJECTIVES
The objectives of the study are:
i. To analyze the various monetary policy objectives and instrument for the period.
ii. To ascertain the level of success of policy measures against desired objects.
iii. To identify the factors that tends to hinder the full attainment of desired objectives.
iv. To recommend the appropriate policy measures for the achievement of specific objectives as well as recommend solution to problem that hinders the full attachment of such objectives.
1.4 STATEMENT OF HYPOTHESIS
The following hypothesis is been formulated to guide the study.
H0: Monetary policy measures have no impact on the economic stabilization in Nigeria.
H1: Monetary policy measures have impact on the economic stabilization in Nigeria
1.5 SIGNIFICANCE OF THE STUDY
These researches provide insight into monetary policy measures as an instrument of economic stabilization and will therefore be of valuable use to the following set of people.
i. To student, it will provide a compliment to the fair existing text on monetary policy and economic stabilization.
ii. To bankers, it will also find a valuable tool toward analyzing the effect of government action on their activities whether it is valuable or not.
iii. To investors, it will serve as a guideline on the effect of monetary policy on various sectors of the economy in which their fund can be invested.
iv. To the ordinary reader, this work will serves as an open eye and a valuable store of knowledge.
1.6 SCOPE AND LIMITATION OF THE STUDY
This research work covers the monetary policies from (1980 – 2010). This study will cover the relationship between the individual who would wish to know about the country’s economic state, and it is hoped that it will go a long way to solve some of the economic problems as regards to monetary policies and its measure as an instrument of economic stabilization.
1.7 DEFINITION OF TERMS
Monetary stock: This is the amount of money in circulation at any point in time.
Reserve money: This refers to the amount of money, banks are required to maintain in their vaults.
Reserve ratio: This is the ratio of deposit that banks are required to maintain with the central banks.
Discount rate: This is the rate at which the central bank make loan to commercial bank as a leader of last resort. This term is used to qualify the central bank, when banks are cash trapped; it is the central bank that lends to them, whenever there is no alternative or liquidation.
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Impact Of Monetary Policy Measures As An Instrument Of Economic Stabilization:
Monetary policy is one of the key tools that governments and central banks use to influence the overall economic performance of a country. Its primary objective is to achieve economic stabilization, which entails controlling inflation, promoting employment, and maintaining overall economic growth. Here are some of the key impacts of monetary policy measures as an instrument of economic stabilization:
- Inflation Control: One of the primary goals of monetary policy is to control inflation. Central banks use various tools, such as adjusting interest rates and open market operations, to influence the money supply in the economy. By reducing the money supply, central banks can help curb inflationary pressures. Conversely, they can increase the money supply to stimulate economic activity during periods of low inflation or deflation.
- Interest Rates: Central banks use changes in interest rates (usually the policy or benchmark interest rate) as a key monetary policy tool. When central banks raise interest rates, borrowing becomes more expensive, leading to reduced consumer spending and business investment. This can help cool down an overheating economy and control inflation. Conversely, lowering interest rates can stimulate borrowing and spending, encouraging economic growth during periods of recession or low growth.
- Exchange Rates: Monetary policy can also influence exchange rates. By adjusting interest rates and intervening in foreign exchange markets, central banks can affect the value of their currency relative to other currencies. A weaker currency can boost exports and economic growth, while a stronger currency can help control inflation by reducing the cost of imported goods.
- Investment and Consumption: Changes in interest rates directly impact the cost of borrowing for businesses and individuals. When interest rates are lowered, borrowing becomes cheaper, which can encourage businesses to invest in new projects and consumers to take out loans for purchases like homes and cars. Conversely, higher interest rates can discourage borrowing and reduce investment and consumption.
- Asset Prices: Monetary policy can have a significant impact on asset prices, such as stocks and real estate. Lower interest rates tend to boost asset prices as investors search for higher returns, potentially leading to asset bubbles. Conversely, higher interest rates can put downward pressure on asset prices.
- Financial Stability: While monetary policy aims to stabilize the economy, it can also affect financial stability. Low-interest rates, for example, can encourage excessive risk-taking and leverage in financial markets. Central banks must balance their goals of economic stabilization with the need to ensure the stability of the financial system.
- Income Distribution: The impact of monetary policy measures can vary across different segments of society. For instance, lower interest rates may benefit borrowers but hurt savers who rely on interest income. Thus, monetary policy can influence income distribution within the economy.
- Expectations: Central bank communication is crucial in shaping expectations about future monetary policy actions. Clear and consistent communication can help guide businesses and consumers, influencing their decisions regarding investments, spending, and saving.
- Global Implications: In an interconnected global economy, the monetary policy of one country can have spillover effects on other countries. Changes in interest rates and exchange rates can impact trade balances and capital flows, affecting international economic stability.
In summary, monetary policy is a powerful tool for economic stabilization, with various channels through which it can influence economic outcomes. Central banks carefully calibrate their policy measures to achieve their dual mandate of price stability and maximum sustainable employment while taking into consideration the unique circumstances of their economies. However, the effectiveness of monetary policy can be influenced by other factors such as fiscal policy, financial market conditions, and global economic developments.