CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

One of the major issues which have occupied the mind of government for years is the impact of monetary policy as a tool for price stability in Nigeria. Despite the lack consensus amongst the economy, there is remarkable strong agreement that monetary policy as an economystabilizing measure in Nigeria refers to the persistence rise in the general price level.

Monetary policy is one of the macroeconomic policies available for managing the economy. It is however important today because its effects on economic aggregates such as price, output, interest rates and exchange rates. 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 the money stock by the monetary authority involves the expansion and contraction of money, influencing interest rate to make money cheaper or more expensive depending on the prevailing economic situation.

1.2    STATEMENT OF THE PROBLEM

The monetary policy implemented in the economy over the past years has been detrimental and inconsistent with developmental needs of the economy (Apata J.T, 2007). This concern has exerted pressures on the monetary authorities in Nigeria to re-examine and re-evaluate their monetary policies with the view of finding possible solutions. As a result of this, the Structural Adjustment Programme (SAP) as introduced in Nigeria in 1986 in order to correct the structural imbalances in the economy and to liberalize the financial system.

Despite various actions used by the monetary authorities in administering monetary policy in Nigeria, there are still limits to the effectiveness of monetary policy. There has been a wide discrepancy between target and outcome due to the fact that the central bank has not been able to achieve the various objectives it set out for itself. For instance, there has been a problem hitting inflation target. The inflation target in 2008 was 7% but the performance was about 19%. Nigeria needs an effective, efficient, sound and consistent monetary policy that has a positive effect on interest rate, employment and real output, so as to minimize the economic problems disturbing Nigeria as a developing country.

1.3    RESEARCH QUESTIONS

What is the effect of monetary policy on price stability in Nigeria?

To what extent do the instruments of monetary policy control inflation in Nigeria?

What are the contributions of monetary policy towards developing Nigeria?

1.4    OBJECTIVES OF THE STUDY

This study seeks to achieve the following objectives;

I.  To determine the impact of monetary policy on inflation in Nigeria.

II.  To empirically examine the effectiveness of monetary policy on economic stability in Nigeria.

III.  To analyze the contributions of monetary policy towards promoting growth and development of the Nigerian economy.

1.5    RESEARCH HYPOTHESES

The hypothesis to be tested in the course of this research work is stated below;

H1 = Monetary policy has significant impact on inflation in Nigeria. 

H2 = Monetary policy has no significant impact on inflation in Nigeria.

1.6    SIGNIFICANCE O THE STUDY

This study is significant in the following ways;

I.  It would provide an objective view of the effectiveness of the monetary policy in Nigeria.

II.  It would provide an economic basis upon which to examine the effect of monetary policy on the Nigerian economy.

III.  It would provide policy recommendations to the policy makers on ways to make the Nigeria economy vibrant through the monetary policy.

1.7    SCOPE OF THE STUDY / LIMITATION OF THE STUDY

This study will focus on major growth and development components which are vital parts of monetary policy. The study will also empirically examine the effectiveness of monetary policy in the Nigerian economy. Factors that affect smooth execution of the project include inadequate finance and short time.