AN EVALUATION OF MONETARY POLICY IN NIGERIA AND ITS IMPACT ON ECONOMIC GROWTH (1984 – 2015) ABSTRACT
The study examined an evaluation of monetary policy in Nigeria and its impact on economic growth. More specifically, the study sought to assess monetary policy and economic growth in Nigeria. The study focuses on major growth components such as the Gross Domestic Product (GDP), and price level, while qualitative research method was adopted. The variables of interest germane of the study are real gross domestic product (RGDP), broad money supply (M2), required reserve ratio (RRR), discount rate (DIT) and inflation rate (INF). The econometric techniques use to analyze the data are Unit Root test, Johansen Cointegration test, Ordinary Least Square (OLS) technique and the Granger Causality test. Result from the study indicated that there is no pair wise causality between M2 and RGDP, RRR and RGDP, INF and RGDP, RRR and M2, DIT and M2, DIT and RRR, INF and RRR and INF and DIT at 5% their probability values exceeds the standard 0.05. Base on this, the study advised that there should be a consistent fight from the demand and supply side plus political approach by means of political and policy stability., secondly, An effective tax policy should be adopted, making it impossible for tax evasions and avoidance to actualize the goal of income policy., lastly constraints to the effectiveness of past monetary policies should be eliminated and consistent and more adopted.
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
“Monetary policy is known to be a vital device that a country can set out for the maintenance of domestic price and exchange rate viability, as a critical condition for the achievement of a sustainable economic growth and external viability”(Amasomma, 2011). According to Dwivedi Monetary policy is the deliberate use of monetary instruments (direct and indirect) at the disposal of monetary authorities such as central bank in order to achieve macroeconomic stability. Monetary policy is essentially the tool for executing the mandate of monetary and price stability. Monetary policy is essentially a program of action undertaken by the monetary authorities generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals. Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activities. It can also be described as the art of controlling the direction and movement of monetary and credit facilities in pursuance of stable price and economic growth in the economy (CBN 1992).
Like any other developing country, Nigerian government adopts three types of public policies to carry out the objective of income distribution and allocation of resources. These tools of public policy include: monetary policy, fiscal policy and income policy tools. In Nigeria, government has always relied on monetary policy as a way of achieving certain economic objective in the economy such macroeconomic objectives include; employment, economic growth and development, balance of payment equilibrium and relatively stable general price level. The reason for choosing monetary policy is the fact that monetary policy has very serious implications for both fiscal and income policy measures.
Since its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a central bank, which is the regulation of the stock of money in such a way as to promote the social welfare (Ajayi, 1999). This role is anchored on the use of monetary policy that is usually targeted towards the achievement of full-employment equilibrium, rapid economic growth, price stability, and external balance (Fasanya et al, 2013; Adesoye et al, 2012). Over the years, the major goals of monetary policy have often been the two later objectives. Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on assumption that these are essential tools of achieving macroeconomic stability (Aliyu and Englama, 2009). A close observation of these definitions of monetary policy shows that monetary policy boils down to adjusting the supply of money in the economy to achieve some combination of inflation and output stabilization. Most economist agree that in the long run output usually measured by gross domestic product (GDP) is fixed, so any changes in the money supply only cause prices to change. But in the short-run, because prices and wages usually do not adjust immediately, changes in money supply can affect the actual production of goods and services (Koshy, 2012).
According to Anyanwu (2003), countries seeking for sustainable economic growth after a period of macroeconomic imbalances must first get stabilized. In Nigeria, monetary policy effectively implemented is an important tool for stable economic growth. The primary goal of monetary policy in Nigeria has been the maintenance of domestic price and exchange rate stability since it is critical for the attainment of sustainable economic growth and external sector viability (Sanusi, 2002). Economic growth is essential in an economy as it reduces poverty as well as improving standard of living. The growing importance of monetary policy has made its effectiveness in influencing economic growth a priority to most governments. Despite the lack of consensus among economists on how monetary policy actually works and on the magnitude of its effect on the economy, there is a remarkable strong agreement that it has some measure of effects on the economy (Nkoro, 2005). Economic growth has long been considered an important goal of economic policy with a substantial body of research dedicated to explaining how this goal can be achieved (Fadare, 2010).
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