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Impact Of Monetary Policy On Economy

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61 Pages
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Monetary policy, a fundamental tool wielded by central banks, exerts a profound influence on economic dynamics. Through mechanisms such as interest rate adjustments, open market operations, and reserve requirements, monetary policy aims to regulate money supply, inflation, and economic growth. By lowering interest rates, central banks stimulate borrowing and investment, fostering economic expansion. Conversely, raising interest rates can curb inflationary pressures and cool down an overheating economy. However, such actions may also dampen consumer spending and business investment, potentially leading to a slowdown in economic activity. Moreover, the effectiveness of monetary policy depends on various factors including the prevailing economic conditions, the responsiveness of financial markets, and external shocks. Thus, while monetary policy plays a crucial role in shaping economic outcomes, its impact is contingent upon a multitude of interconnected variables, highlighting the intricacies of macroeconomic management and the need for nimble policymaking strategies.

ABSTRACT

The earnest expectation of every economy over the year has been to attain the highest possible level of economic growth and development. This research work is on the ‘’Impact of Monetary Policy on Economic growth in Nigeria’’ between the period of thirty years (30) covered from 1980-2010. The Impact of monetary policy in an economy has been a continuous discussion in every economy especially developing economics which will give rise to economic growth and development of a nation. In carrying out this research, Secondary data was used on PC Give 8.00 version package to regress the model with GDP as the dependent variable, and money supply, inflation rate, liquidity ratio and interest rate as independent variables. The model explained that the impact of monetary policy on economic growth is statistically significant, through the signs obtained from its prior expectation is positively related to GDP but does not hold strong enough. Money Supply has a positive relationship and also significant impact on the economy. Inflation has a negative relationship, while the interest rate and liquidity ratio is positively significance on impact of economic growth. R-Squared show 73% increase on the GDP. It is therefore recommended that some effective policies are to be made in constraints to the in effectiveness of past monetary policies which should be eliminated.

TABLE OF CONTENT

Contents Pages
Title Page
Approval Page
Dedication
Acknowledgement
Table of Content
Abstract

 

CHAPTER ONE
1.0 INTRODUCTION

1.1 Background Of The Study
1.2 Statement Of The Problem
1.3 Objectives Of The Study
1.4 Hypothesis
1.5 Significance Of The Study
1.6 Limitations Of The Study
1.7 Scope Of The Study

CHAPTER TWO
2.0 LITERATURE REVIEW AND THEORETICAL FRAMWORK

2.0 Review of Related Literature
2.1 Review of the Theoretical Literature
2.3 Meaning of Monetary Policy
2.4 Objectives of Monetary Policy
2.5 Monetary Policy Target in Nigeria
2.6 Operation of Monetary Policy
2.7 Factor Affecting Monetary Policy Manipulation in ControllingEconomic Activities
2.8 Monetary Policy as Controlling Measures of Economic Activities

2.9 An Assessment of the Extent of the Implementation of MonetaryPolicies Measure
3.0 measures for Monetary Policy Modification
2.1 Limitation of Previous Study

CHAPTER THREE
3.0 METHODOLOGY

3.2 Model Specification
3.3 Method of Evaluation
3.4 Justification of the Model
3.5 Data Required and Sources

CHAPTER FOUR
4.0 PRESENTATION AND ANALYSIS OF RESULT

4.1 Analysis and Estimation of result
4.2 Units Root Test
4.3 Co integration Test
4.4 Presentation of Regression result
4.5 Interpretation of result
4.6 Economic a Prior Condition
4.7 Statistical test Criteria (First Order Test)
4.8 Economic Test (Second Order Test)

CHAPTER FIVE
5.0 SUMMARY, CONCLUTION AN POLICY RECOMMENDATION

5.4 Summary
5.5 Recommendations and policy options
5.6 Conclusion
5.7 Bibliography
5.8 Journals
5.9 Appendix

CHAPTER ONE

BACKGROUND OF THE STUDY
Nigeria still presents a clear reflection of the third world economy in which the growing economy has some working machinery, monetary and fiscal policies that are aimed at maintaining a balance in the entire economy so that growth and development, which is the ultimate goal of every economy, is realized.
Generally, monetary policy refers to combination of measures designed to regulate the values supply and cost of money in an economy in consonance with the level of economic activity. Monetary policy refers to the credit control measure adopted by the central bank of a country.
Monetary policy according to Olumechere (1988) is a deliberate effort by the monetary authorities to control supply and credit conditions for the purpose of achieving certain broad economic goals Johnson K (1956) define monetary policy as policy employing central bank control of the supply of money as an instrument for achieving the objectives of general economic policy.
According to Salvin (1999) monetary policy is the use of open market operations change in discount rate, change in reserve requirement and other measures available to the monetary authorities to control the rate of growth of money supply. He further noted that the goals of monetary policy are price stability relative full employment and satisfactory rate of economic growth. As Akatu (1993) noted, monetary policy in the Nigeria context encompasses actions of the central bank of Nigeria that affect the availability and cost of commercial and merchant bank reserve balances and thereby the overall monetary and credit condition in the economy. The main objective of such action is to ensure that over time, the long-run needs of the growing economy at stable prices.
The aim of monetary policy are basically to control the inflation, maintain a
healthy balance of payment positions for the country in order to safeguard the external value of the national currency and promote an adequate and sustainable level of economic growth and development. The formulation is done by the federal government, mostly announced during budget speeches while the enforcement of the policy is solely the responsibility of the central bank of Nigeria (CBN) yearly.
Economic growth on the order hand according to Kindleberger (1965) means more output, while Friedruan John (1972) defines growth as an expansion of the system in one or more dimensions without a change in its structure, and development as an innovative process leading to the structural transformation of social system.
This economic growth is related to a quantitative sustained increase in the countries per capital output or income accompanied by expansion in its labor force, consumption, capital and volume of trade. An economy on the other hand can be said to be developed when there is a quantitative and qualitative increase
in the amount and quality of goods and services produced in the country. In its widest aspect economic growth and development implies raising the standard of living of the people and reducing inequalities in income distribution.
According to Michael P. Todaro/ Stephen C. Smith (2011) development is the process of improving the quality of all human lives and capabilities by raising people‟s levels of living, self-esteem, and freedom.
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 money stock by the monetary authority involves the expansion or contraction of money, influencing interest rate to make money cheaper or more expensive depending on the prevailing economic situation.
The evaluation of monetary policy intends to show how this macroeconomic policy is formulated and executed in practice particularly in an environment of federal government fiscal dominance and highly liquid banks.
Between April 1992 and March 1976, the use of an aggregate credit ceiling was dropped for specification on several distribution of bank credit throughout the period they also served quitted effectively as instruments of monetary control.
The situation was particularly serious between 1982 and 1985 when stringent economic controls were not effectively used in arresting the deteriorating
situation. In-evitable a period of economic adjustment has to come with the introduction of the structural adjustment programmed1 in July 1986. Te overall aim of the economic adjustment process embarked upon by the federal government in July 1986 was to restructure the federal production and consumption pattern of the economy the elimination of price distortion and reduction of the over dependence of the economy on the export of crude oil and impart the raw materials and consumer goods.
In the course of these project, detailed attention will be paid to monetary policy in which its frame work and implementation will be analyzed and its impact on economic growth in the period of 1930 to 2010.

1.2 STATEMENT OF THE PROBLEM
The monetary policy implementations in the economy over the past years were detrimental to, and inconsistent with the development needs of economy. This concern has exerted pressures on the view to finding possible solutions. As
a result of this the structural adjustment program was introduces in the economy and to liberalized the financial system.According to Anyanwu (1993) monetary policy is a major economic stabilization weapon which involves measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve macroeconomic objectives or goals. The problem lies on making use of policy that will solve the economic problems instead of the economy to have low level 1of investment, income and also the level of demand and supply will reduce.
Another problem is how to restructure the production and consumption pattern of the economy through the elimination of price distortion.
Another problem is the power response of the financial system to monetary policies control measures which has to do with lack of transparency in the separation of financial intermediaries. These problems have necessitated further for solution.

1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to assess the effectiveness of the monetary policies in Nigeria and its role in returning the economy backs to equilibrium after an inflationary imbalance.
The specific objectives of this study are:
1. To examine the trend and structure of monetary policy in Nigeria.
2. To empirically investigate the impact o monetary policy on Nigeria. economy
3. To evaluate the performance of monetary policy in Nigeria over the years under review.

1.4 RESEARCH HYPOTHESIS
To effectively achieve the above mentioned objectives we adopt a null hypothesis:
HO: The monetary policy instrument does not have significant impact on Nigeria economy
HI: The monetary policy instruments have significant impact on Nigeria. Economy

1.5 SIGNIFCANCE OF THE STUDY.
Establishing a monetary policy framework that follows and builds on recent historical experience around the world in Nigeria which should bring about economic growth and development. The monetary control measures which relies heavily on credit ceiling and selective credit controls, increasingly failed to achieve the set monetary targets as their implementation became less effective with time. The importance of the study are:
1. To ensure the efficient and effective control of the money in the economics.
2. To ensure the achievement of desired national objectives.
3. It influences the direction of economic progress in the country.
4. To find out the effectiveness of monetary policy in achieving economic growth during the period under study (1980-2010).

1.6 LIMITATION OF THE STUDY
The major limitation of the study is that of data insufficiency which makes it impossible for the study to adopt a uniform time frame for all the channels. A study of these natures cannot be done without some problem and as such it was constrained by many factors such as:
FINANCE: Financial inadequacy was the major limitation for this work. The researcher was financially independent as a student the need for material trips and logistics needed for this research was not adequately provided.

1.7 SCOPE OF THE STUDY
The research work deals on the impact of monetary policy on economic growth in Nigeria. This research work is covers the period between 1980-2010. The data used is a secondary data, which was obtained from the publication of central bank of Nigeria statistical bulletin and the annual reports of accounts.
The analytical tools employed on this research include to test and regression analysis.

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Impact Of Monetary Policy On Economy:

Monetary policy plays a crucial role in influencing an economy’s overall performance. Central banks, such as the Federal Reserve in the United States, the European Central Bank in the Eurozone, or the Bank of Japan, implement monetary policy to achieve various economic objectives. The impact of monetary policy on the economy can be summarized in several key ways:

  1. Interest Rates:
    • Central banks can adjust the benchmark interest rate (e.g., the federal funds rate in the U.S.) to influence borrowing costs for individuals and businesses.
    • Lowering interest rates encourages borrowing and spending, which stimulates economic activity.
    • Raising interest rates can slow down borrowing and spending, helping to control inflation and asset bubbles.
  2. Inflation:
    • One primary objective of monetary policy is to maintain price stability by controlling inflation. Central banks often target a specific inflation rate (e.g., 2% in many developed economies).
    • When inflation is too low, central banks may lower interest rates to stimulate economic activity and raise inflation.
    • Conversely, if inflation is too high, central banks may raise interest rates to cool down the economy and prevent excessive price increases.
  3. Economic Growth:
    • Monetary policy can influence the overall level of economic activity. Lower interest rates and easy monetary conditions typically boost economic growth by encouraging borrowing, investing, and spending.
    • Conversely, higher interest rates can moderate economic growth to prevent overheating and the risk of economic bubbles.
  4. Exchange Rates:
    • Changes in interest rates can impact a country’s currency exchange rates.
    • Lower interest rates tend to weaken a nation’s currency, making exports more competitive and imports more expensive, which can boost export-oriented industries.
    • Higher interest rates can strengthen a country’s currency, potentially reducing exports but making imports cheaper.
  5. Investment and Capital Flows:
    • Monetary policy influences investment decisions by affecting the cost of capital. Lower interest rates encourage businesses to invest and expand.
    • It can also influence capital flows, attracting or repelling foreign investment based on interest rate differentials between countries.
  6. Financial Markets:
    • Monetary policy has a direct impact on financial markets, influencing stock prices, bond yields, and other asset prices.
    • Lower interest rates tend to push up asset prices, while higher rates can put downward pressure on asset values.
  7. Employment:
    • The impact on employment can be indirect, as monetary policy affects overall economic conditions.
    • Lower interest rates can stimulate job creation by encouraging businesses to invest and expand.
    • However, central banks need to strike a balance, as excessively low rates can lead to financial imbalances and risks.
  8. Consumer and Business Confidence:
    • The perception of future monetary policy actions can influence consumer and business confidence.
    • Clear communication from central banks regarding their intentions can help shape economic expectations.

In summary, monetary policy can have a profound impact on an economy by influencing interest rates, inflation, economic growth, exchange rates, investment, financial markets, employment, and overall economic confidence. However, the effectiveness of monetary policy depends on various factors, including the current economic conditions, the transmission mechanism, and the credibility and independence of the central bank.