ABSTRACT
Monetary policy consists of discretionary measures designed by monetary authorities to regulate and influence the supply, cost and direction of money and credit provided to the economy. This aspect of macroeconomic policy remains one of the cornerstones of economic policy formulation and implementation. Monetary policy is relevant irrespective of the economic framework in place.
With the adoption of the inflation, this study examine the impact of monetary policy in Nigeria using econometric techniques, a model that captures the impact of inflation on monetary policy is specified and estimated using the techniques of Ordinary Least Square for the period of 1985-2008.
The main findings emerging in this study indicated that the demand for money has an inverse relationship between the level of interest rates and inflationary rates. The study also advocated for the inclusion of partial adjustment scheme while modeling money demand functions and hence monetary policy in Nigeria.
CHAPTER ONE
1.1 INTRODUCTION
Monetary policy plays a very crucial role in any economy, being the channel through which financial resources flow from one segment of the economy to the other. It, therefore, represents the major foundation of the modern market economy. Essentially, there are three pivotal roles for the monetary policy namely; the Monetary Policy role, the financial stability role and the overall economic role. Monetary policy in the current Nigeria context, encompasses actions of the central bank that affect the cost and availability of commercial and merchant bank's reserve balances and thereby the overall monetary and credit conditions in the economy (Akaku, 1993) .The primary goal of such actions is to ensure that overtime, the expansion in money and credit will be adequate for the long run need of the growing economy at stable prices.
The short-run objective of monetary policy however include, combating inflationary pressure, restoring a sustainable balance of payment, attainment of full employment level of resources, equitable distribution of income, maintaining a stable exchange rate at internationally competitive level . Sometimes, changes in monetary are undertaken as part of concerted actions to remove obstacles to the growth of savings and efficient allocation of investment.
As is often the case ,the pursuit of these short -term goals tends to conflict with the basic goal of stable, long-term for example, a vigorous anti-inflationary stance would typically require the sacrifice of output growth in the short term. The same might be the case where priority is given to restoring a healthy balance of payments. Similarly, a stable exchange rate objective might call for a tighter control on aggregate demand which would in turn adversely impact output. Moreover, attaining the objective of exchange rate stability at local currency, with attendant cost pressure on the price level. In sum, difficult trade-offs are inherent in the conduct of monetary policy, making the central bank, a target of criticism and various kind of pressures. Over the years, the objectives of monetary policy have remained the attainment of internal and external balance. However, emphases on techniques/instruments to achieve those objectives have changes over the year. The major phase in the pursuit of monetary policy that is being examined was between 1992 to 2006. The economic environment that guided monetary policy before 1986 was characterized by the dominance of oil sector, the expanding role of the public sector in the economy and over dependency on the external sector. in other to maintain price stability and a healthy balance of payment position, monetary management depended on the use of direct monetary instrument such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits. The use of market based instruments was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberate restraint on interest rates.
However, as a result of the crash in international oil market in the 1980s and the resultant deteriorating economic conditions, the Structural adjustment Programme (SAP) was adopted in July, 1986. This programme was designed to achieve fiscal balance and balance of payments viability by altering and restructuring the production and consumption patterns of the economy, eliminating price distortions, reducing the heavy dependence on the crude oil exports and consumers good imports, enhancing the non-oil export base and achieving sustainable growth. Other aims were to rationalize the role of the public sector and accelerate the potentials of the private sector.
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