The core mandate of Nigeria central bank is the regulation and maintenance of money supply and monetary policy. The regulation and monetary implementation of monetary policy is done by the CBN in line with the mandates as specified in the CBN Act of 1958. In addition to price stability, the promotion of growth and employment are the secondary goals of monetary policy.

 The monetary authorities’ strategy for management is based on the view that inflation is essentially a monetary phenomenon. Because targeting inflation in Nigeria economy, money supply approach is considered the appropriate methods, the central bank of Nigeria (CBN) chose a monetary targeting policy framework to achieve the objectives of price stability. With the broad measure of money (M2) as the intermediate target, and the monetary base as the monetary target of CBN and the instrument to achieve the objectives.  
These instruments include reserve requirements, open market operations on Nigeria Treasury Bills (NTBS), liquid asset ratios and the discount windows.
            With these instruments, the CBN hoped to direct the flow of loanable funds with a view to promoting rapid economic development through the provision of finance to the preferred sectors of the economy such as the agricultural sector, manufacturing and residential housing. During the 1970s, the Nigeria economy experienced major structural changes that made it increasingly difficult to achieve the aims of monetary policy. The dominance of oil in the country’s export market began in the 1970s for example, in 1970, the share of oil revenue in total export value was about 58 percents and this increased to over 95 percent during the 1980s. The increase in Nigeria’s external reserve in the 1970s. Furthermore, the rapid monetization of the increased crude oil receipts resulted in large injection of liquidity into the economy, which induced rapid monetary growth. Infact, between 1970 and 1973, government spending averaged about 13 percent of gross domestic product (GDP) and this increased to 25 percent between 1974 and 1980. This rapid growth in government spending came not from increased tax revenues but the absorption of oil earnings into the fiscal sector, which moved the fiscal balance from a surplus to a deficit spending, led the government to borrow from the banking system in order to finance the domestic deficits. At the same time the government was saddled with foreign deficits, which had to be financed through massive foreign borrowing and the drawing down of external reserves.
            Giving the state of affair in the economy at this period, government through its monetary authority strives to reverse the deterioration macroeconomic imbalance; declining GDP, balance of payment disequilibrium, high inflation rate, heavy debt burden, high rate of unemployment, rising poverty level. Government embarked on austerity measures in 1982 which successfully reduced the inflation rate and held to achieve a 9.5 percent growth in real GDP in 1985. Although, the achievement was transitory since the economy did not establish a strong base for sustained economic growth.
            Government of Nigeria in her attempts to achieve a sustained economic growth adopted the structural adjustment program (SAP) sponsored by the international monetary fund (IMF) in June 1986. The SAP was a structural and sectoral macroeconomic policy reform whose main strategies were;
·  The liberalization of the external trade and payment systems
·  The elimination of price and interest rate control
·  The adoption of a market based exchange rate for the domestic currency (Naira).
·  The reliance on market forces as the major determinants of economic activity.
Infact, with the adoption of SAP in 1986, the CBN reached an important milestone in 1986 when it decided to adopt M2 as an important and intermediate target for monetary policy. While this choice raise a key question in terms of why the CBN considered M2 as the appropriate intermediate target instead of interest rate or nominal GDP or inflation targeting. Given the fact that interest rate and prices were controlled pre – SAP, it is not difficult to see why the CBN ruled out interest rate targeting or inflation targeting as viable policy options. Furthermore, the structure of the financial markets in less developed countries renders interest rate targeting ineffective. As Taylor (2004) pointed out that “if financial market are weak, the effectiveness of transmitting policy through interest rate will be limited”. With these controls and the constraints due to weak financial markets nominal GDP targeting may not have succeeded. As for the commitment to rules, many countries apply rules because policy rules may aid in focusing policy discussion in term or intermediate and operating targets. Over the past decades, many countries adopted the Taylor rule, which Taylor (2004), developed for the United States.
According to Taylor (2004), these rules can be part of the monetary policy strategy in emerging market economics. More recently, Batin (2004) argued that for Taylor rule to be applicable to emerging market economy like Nigeria, modifications have to be made because of the specific features of the emerging market economics. From these analyses, the key issue to applying Taylor rule to monetary policy making in Nigeria is commitment to target rules.
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