THEORETICAL REVIEW
The study seeks to establish a theoretical foundation
that it would be based on. This investigation would be on the research carried
out by Husnan in Indonesia and the one carried out by Sanusi (2002) in Nigeria,
respectively. They observed that to achieve price stability, inflation,
exchange rate etc. that a transmission mechanism of the monetary policy is
useful in influencing the prize and quantity of the above mentioned
macroeconomic indication and ultimately real economic activities.
Soludo
(2010) noted that the central issue of controversy remains the role and
usefulness of monetary policy as a counter - cyclical policy tool in prize
stabilization.
Monetary
policy got its root from the work of Irving fisher (see Diamond , 2003. p. 49)
who lay the foundation of the quantity theory of money through his equation of
exchange. In his proposition money has no effect on economic aggregates but
prize. However, the role of money in an economy got further elucidation from
(Keynes 1930 p.90) and other Cambrige economist who proposed that money has
indirect effect on other economic variable by influencing the interest rate
which affects investment and cash holding of economic agents. The position of
Keynes is that unemployment arises from inadequate aggregate demand which can
be increased by increase by money supply which generates increase spending,
increase employment and economic growth. However, he recommends a at some
occasion, monetary policy could fail to achieve its objective the role of
monetary policy which is of course influencing the volume, cost and direction
of money supply was effectively conversed by (Friedman, 1968. p. 1-17), whose
position is always and everywhere a monetary phenomenon while recognizing in
the short run that increase in money supply can reduce unemployment but can
also create inflation and so the monetary authorities should increase money
supply with caution.
Monetary
policy instrument on the other hand, are the variable under the control of
three monetary authorities and have effect on the proximate targets (Anyanwu
J.C.et.al, 1997:271). These instrument can be quantitative, general, market
based, quantitative selective, direct (Jhingan, Ml,2001:316). The qualitative,
(selective or direct tools)among others include:
·
Aggregate
credit ceilings
·
Deposit
ceiling
·
Exchange
controls
Restriction
on the placement deposit
Special
deposit
Stabilization
securities
While
the indirect or market-based tools includes
·
Open
market operation (OMO)
·
Cash
reserve requirement
·
liquidity
ratio
·
minimum
rediscount rate
·
parity
changes
·
selective
credit control
The
CBN uses monetary policy in order to maintain prize stability. Hence, price
stability occurs when goods services in general are not getting rapidly more
expensive (that is inflation). Or less expensive (that is deflation). At
present, price stability is defined as keeping inflation on average over the
medium term. Inflation on the other hand depicts on economic situation where
there is a general rise in the price of goods and services continuously.
The economic environment that guided monetary policy
1986 was characterized by the dominance of the oil sector, the expanding role
of the public sector in the economy and over – dependence on the external
sector. In order to maintain price stability and a healthy balance of payments,
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
under developed nature of the financial market and deliberate restraint on
interest rates. The most popular instrument of monetary policy was the issuance
of credit rationing guidelines, which primarily set the rates of change for the
component and aggregate commercial bank loans and advances to the private
sector. And there by stem inflationary pressures. The fixing of interest rates
at relatively low level was done mainly to promote investment and growth.
Occasionally, special deposits were imposed to reduce the amount of free
reserves and credit creating capacity for the banks. Minimum cash ration were
stipulated for the banks in the mid-1970s on the basis of their total deposit
liabilities, but since such cash ratios were usually lower than those
voluntarily maintained by the banks, they proved less effective as a restraint
on their credit operation.
Nzotta and Okereke (2001) opined
that the pursuit of price stability invariably implies the indirect pursuit of
other objectives such as economic growth which can only take place under
condition 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 to him is
to ensure that money supply is at a level that is consistent with the growth
rate will be ensured. Without mincing words, the literatures stipulate that the
pursuant of prize stability therefore, encompasses all main areas in which the
central bank can contribute towards stabilizing the macroeconomic environment of the country.
In order words, the
movement from a fixed regime was among other things to stimulate growth and
maintain a healthy external balance which is what is generally referred to as
macroeconomic stability.
In particular, the theoretical foundation will be based on the
monetary policy transmission mechanism of Sanus; (2002) and the research of
Husnan, an example of developed and developing economy.
EMPIRICAL
LITERATURE
The empirical studies of monetary policy in Nigeria
recorded varying results. Abata, Kehinde and monetary policies influence
economic growth and development in Nigeria. They argued that curbing the fiscal
indiscipline of government will take much more than enshrining fiscal policy
rules in our statute books. This is because the statute books are replete with
dormant rules and regulation. It notes that there exists a mild long-run
equilibrium relationship between economic growth and fiscal powerful portability
stakeholders strong enough to challenge government fiscal recklessness will
need to emerge.
Amassoma, Nwosa and Olaiya(2011) appraised monetary
policy development in Nigeria and also examine the effect of monetary policy on
macroeconomic variable in Nigeria for the period 1986 to 2009. Adopting a
simplified ordinary least squared technique after conducting the unit root and
co-integration tests, the findings showed that monetary policy have witnessed
the implementation of various policy initiatives and has therefore experienced sustained
improvement over the years. The result also shows that price stability within
the Nigeria economy. The study concludes that for monetary policy to achieve
its other macroeconomic objective such as economic growth, there is the need to
reduce the excessive expenditure of the government and align fiscal policy
along with monetary policy measure.
Okwu, Obiakor, Falaiye and owolabi (2011) examined the
effects of monetary policy innovations on stabilization of commodity prices in
Nigeria. Consumer price index (CPI), broad money aggregates (BMA) and monetary
policy Rate (MPR) were applied to a multiple regression model specified on
perceived functional link between the indicators of Central Bank of Nigeria’s
monetary policy innovations and commodity prices indicator. The result showed
that positive relationship existed between the respective indicators of
monetary policy innovations and indicators of commodity prices responded more
to monetary policy rates than broad money on consumer price index and the
commodity prices responded more to monetary policy rates than to broad money
aggregates; although both broad money and monetary policy rate had more
immediate effect on commodity prices, only broad money exerted significant effect
of 0.05 level of significance.
However,
overall effect of both commodity prices was statistically significant.
Hameed, Khaid and Sabit (2012)
presented a review of how the decision of monetary authorities influence the
macro variable like G D P, money supply, interest rates, exchange rates and
inflation. The method of least square explains The relationship between the
variable under study. Tight monetary police with balance adjustment in
independent variables shows a positive relationship with dependent variable.
Nnanna
(2001, p. 11) 0bserve that thought, the monetary management in Nigeria has been relatively more successful
during the period of financial sector
reform which I characterized by the use
of indirect matter than direct monetary
policy tools yet, the effectiveness of monetary policy has been undermined by
the effects of fiscal dominance, political interference and the legal
environment in which the central bank operates. (Busari et-al 2002) state that
monetary policy stabilizes the economy better under a flexible exchange rate
system than a fixed exchange rate system and it stimulates growth better under
a flexible rate regime but is accompanied by serve depreciation, which could
destabilize the economy, meaning that monetary policy would better stabilize
the economy if it is used to target inflation directly than been used to
directly stimulate growth.