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EFFECTIVENESS OF MONETARY POLICY IN ACHIEVING PRICE STABILITY IN NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

Research on effectiveness of monetary policy on economic variables in Nigerian economy has for long been of interest to economist and policy makers however, studies have been carried out on certain aspects of economic variables. These studied are meager and in any case, not covering the effectiveness of monetary policy of price stability in Nigeria, which now necessitated this research work.

An issue which has occupied the minds of government for decades is the effectiveness of monetary policy in influencing price stability despite the lack of consensus among economist on how it actually works and on magnitude of its effect on the economy, there is a remarkable strong agreement that monetary policy has some measure of effect on the economy (Udegbunam 2003).

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 activity. It can 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 an economy (CBN, 1992).

In modern economics, the central bank is the authority with the mandate to manipulating monetary policy instruments to achieving desired macroeconomic objectives.

However, the primary objective of monetary policy cuts across the mandates of most central banks is the maintenance of price stability which is imperative to the attainment of sustainable growth is the focus of these objectives which is specified in the CBN ACT of 1958.

-  Issue of legal currency notes and coins Maintain Nigeria external reserve

-  To safeguard the international value of the legal tender currency.

- Promoting monetary stability and a sound financial system.

-  Act as banker and financial adviser to the federal government.

-Act as a lender of last resort.

The pursuit of price stability invariably implies the indirect pursuit of other objectives such as economic growth which can only take place under conditions of price stability and allocative efficiency of the financial markets, since inflation is generally considered as purely a monetary phenomenon with significant cost to the economy. The primary goal of monetary policy is to ensure that money supply is at a level that is consistent with the growth target of real income such that non- inflationary growth will be ensured. The pursuit of price stability through monetary policy therefore encompasses all main areas in which the Central Bank can contribute towards stabilizing the macroeconomic environment of the country.

1.1    STATEMENT OF THE PROBLEM

Central bank of Nigeria (CBN) has been the sole player in using monetary policy in achieving price stability. Central bank of Nigeria has failed to achieve price stability due to the following:

-  Lack of consensus on what constitute price stability. For example, Shiratsuka (1997) provides three definition of price stability as follows:

-  A tolerable target for inflation rate (if achieved assumes the attainment of the price stability objective)

-   Sustainable growth underprice 'stability, implying price stability is achieved at the inflation crate consistent with sustainable economic growth.

- Stability of inflation expectation

-  Moreso, political instability has also been attributed to one of the problem confronting central bank of Nigeria (CBN) in achieving price stability through the use of monetary policy.

1.2    AIM AND OBJECTIVES OF THE STUDY

The aim of this study is to carry out an indepth assessment of the effectiveness of monetary policy in achieving price stability in Nigeria economy. To this end, this study will investigate whether monetary policy will help in achieving price stability.

The objectives of the study are as follows:

(a)     To examine the effectiveness of interest rate In achieving price stability in Nigeria economy

(b)    To examine the effectiveness of money supply In achieving price stability in Nigeria economy.

1.3    RESEARCH QUESTIONS

(i)     What will be the effectiveness of interest rate ill achieving price stability in Nigeria economy?

(ii)    Will money supply affect price stability ill Nigeria economy?

(iii)   What will be the effectiveness of interest rate and money supply in achieving price stability in Nigeria economy?

(iv)   What will be the effectiveness of interest rate and money supply in achieving price stability in Nigeria economy?

(v)    Will inflationary rate affect the economic growth of Nigeria economy?

(vi)   What will be the effectiveness of interest rate and money supply in achieving economic growth in Nigeria economy?

1.4     SIGNIFICANCE OF THE STUDY

To assess the effectiveness of monetary policy on price stability in Nigeria economy. This study will reflect the effectiveness of monetary policy towards economic growth.

The benefits to be derived from this study will assist the policy makers to fine-tune strategies regarding monetary policy, how the money should be circulated in economy. Other people that also benefits from this research work include instructors, friends and colleagues in the field of studies etc.

1.5     RESEARCH HYPOTHESIS

The research hypothesis are as follows:

Hypothesis 1

Ho:   There is no significant difference between interest rate and inflation rate.

HA:     There is significance difference between interest rate and inflation rate.

Hypothesis 2

Ho:   There is no significance difference between money supply and inflation mate.

HA:     There is significance difference between money supply and inflation rate.

Hypothesis 3

Ho:   There is no significance difference between interest rate, money supply and inflation rate.

HA:     There is significance difference between interest rate, money supply and inflation rate.

1.6     RESEARCH METHODOLOGY

The research methodology is specifically designed to carry out effectiveness of monetary policy on price stability in Nigeria economy for the past seventeen years (17 yrs): 1993-2009.

In this regard, the sources of data are basically based on secondary sources of data collections. 'These are in the form of dailies, statistical research findings such as: Central Bank of Nigeria (CBN) review etc while regression (OLS) will be used to solve the collection data. The methodology shall be descriptive and qualitative.

1.6.1 MODEL SPECIFICATIONS

Model I

Inf Rat = βo + 1 INTt + Et

INFt = Inflation Rate

Where βo - Constant

β1 = Parameter of the Equation

INTt = Interest Rate

Et = Error of Stochastic Term in Time T

1.8    SCOPE OF THE STUDY

The scope of the study shall cover the effectiveness of monetary policy in achieving price stability in Nigerian economy development during the period 1993-2009.

1.9    LIMITATION OF THE STUDY

The perceived limitations are as follows:

(a]     The possibility of getting the relevant data and the information for the purpose of the research work.

(b)    The availability of fund for the research work is another constraint.

(c)     Time constraint is another limitation as the research work is combined with the academic work in school as a final year student.

1.9    DEFINITION OF TERMS

Money: It is anything that is general acceptable as a medium of exchange, store of value.

Monetary policy: Is an instrument that Central Bank of Nigeria uses to control the circulation and money supply in an economy.

Inflation: It is persistence Increase In price of goods and services.

Stability: When there is a fixed price for particular goods and services.

1.10   ORGANIZATION OF THE STUDY

This study will be structured into five (5) chapters. Chapter one will examine the introductory aspect of the study containing the background of the study, statement of problem, aim and objectives, research questions, research hypothesis, research methodology, significance of the study, limitations of the study and organization of the study. Chapter two will contain the review of relevant literatures. Chapter three will focus on the structural analysis. Chapter four will examine the data analysis, presentation and interpretation of the results findings. Chapter five will focus on the summary, findings, recommendations and conclusion then the references.

REFERENCES

William J. McDonough, President Federal Reserve Bank of New York: A  Framework Work for the Pursuit of Price    Stability.(2004)

Mr. B. A. Oke (1995): The Conduct of Monetary Policy by the Central   Bank of Nigeria (CBN)

Central Bank of Nigeria (CBN) Annual Report and Statement of Account  for the Year Ended 31st December, 2006.

Central Bank of Nigeria (CBN) Economic and Financial Review Vo1.38 No.2: Inflation Targeting: A Monetary Policy Management Framework for the Attainment of price Stability in Nigeria by Dr. O.A. Uchendu.

M. L. Jhigan (2002); Macro Economic Theory: 11th Edition Revised  Edition.

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