The implementation of
the Structural Adjustment Programme (SAP) in 1986 and de-regulation of
financial sector in Nigeria offered a lot of policy change in monetary policy
development in Nigeria. The deregulation brought an establishment of exchange
markets in 1986. In 1987, there was a removal of interest rate, unification of
foreign exchange markets and liberalization of bank licensing. The third high
inflation episode started in the last quarter of 1987 and accelerated through
1988 to 1989. This episode is related to the fiscal expansion that accompanied
the 1988 budget.
In 1989, banks were permitted to pay interest on demand
deposits, ban on credit extension based on foreign exchange deposits. In 1990,
a uniform accounting standards was introduced for banks while a stabilization
security to mop up excess liquidity was also introduced. In 1991, inflation
fell reaching one of its lowest points in 1991 that is 13% (CBN 2009). There
was an embargo on bank licensing while the administration of interest rate was
introduced. Central Bank was also empowered to regulate and supervise all
financial institutions in the economy. In 1992, privatization of government
owned banks commenced, credit control was removed in 1993, indirect monetary
instrument were introduced while in 1994, re-imposition of interest and
exchange rate controls were made. In 1997, the minimum paid up capital of
merchant and commercial bank was further raised to a uniform level of N500 million. In 2001, Universal banking
system was introduced. In 2005, CBN compelled all commercial banks to raise
their capital base from N2 billion to N25billion. In 2006, the CBN introduced a
new monetary policy implementation frame work (monetary policy rate (MPR) to
replace the minimum Re – discount Rate (MRR).
The various policies initiated
were to bring about stability in the macroeconomic variable. Overall, the CBN’s
amended Act granted the Bank more discretion and autonomy in the conduct of
monetary policy. Consequently, the focus of monetary policy during his period
shifted significantly from growth and developmental objectives to price
stability. The operational frame work for indirect monetary policy management
involved the use of market (indirect) instruments to regulate the growth of
major monetary aggregates. Under this frame work, only the operating variables,
the monetary base or its components are targeted, while the market is left to
determine the interest rates and allocate credit. Essentially, the regime
involves an econometric exercise, which estimates the optimal monetary stock,
which is deemed consistent with the assumed targets for GDP growth, the
inflation rate and external reserves. Thereafter, market instruments are used
to limit banks reserve balance as well as their credit creating capacity.
MONETARY POLICY TRANSITION MECHANISM
There are different
transmission channels through which monetary policy affects economic activities
and these channels of transmissions have been broadly examined under the
monetarist and Keynesian schools of thought. The monetarist postulates that
change in the money supply leads directly to a change in the real magnitude of
money. Describing this transmission mechanism, (Friedman and Schwartz. 1963)
say an expansive open market operation by the central bank, increase stock of
money through the multiplier effect. In their portfolios, the bank and non-bank
organizations purchase securities with characteristic of the type sold by the
central bank, thus stimulating activities in the real sector. This view is
supported by (tobin, 1978) who examines transmission effect in terms of assets
portfolio choice in that monetary policy triggers asset switching between
equity, bonds, commercial paper and bank deposits. He says that tight monetary
policy affects liquidity and bank ability to lend which therefore restricts
loan to prime borrowers and business firms to the exclusion of mortgages and
consumption spending thereby contracting effective demand and investment.
Conversely, the Keynesian posit that change in money stock facilitates
activities in the financial market affecting interest rate, investment, output
and employment. (Modigliani, 1963) supports this view but introduced the
concept of capital rationing and said wiliness of transmission. In their
analysis of use of bank and non bank funds in response to tight monetary policy
(Oliner and Rudebush, 1995) observe that there is no significant change in the
use of either but rather larger firms crowd out small firms in such time and in
like manner (gentler and Gilchrest, 1991) supports the view that small
businesses experience decline in wan facilities Turing tight monetary policy
and they are affected more adversely by change in bank related aggregates like
broad money supply. Further investigation by (Borio, 1995) who investigated the
structure of credit to non government borrowers in fourteen industrialized
countries observe that it has be influenced by factors such as terms of wan as
interest rates, collateral requirement and willingness to lend.
PERFORMANCE ASSESSMENT OF THE CURRENT MONETARY FRAME
WORK
The performance of the Nigeria
monetary frame work under the post –regime can be assessed according to which
the actual growth in monetary aggregate, GDP growth rate and inflation,
approximate the ex ante policy target Report
from IMF (2004,2005) and the central bank of Nigeria (CBN) shows that both authorities have been
particularly exercise with the appropriate response to mop- up excess liquidity
through the domestic debt management and that has brought down the excess
liquidity induced by the inception of rapid monetization of inflows, minimum
wages adjustment and the financing of governments fiscal deficit through the
banking system.
It will be recalled that one of the major objectives
of monetary policy in Nigeria is prize stability. But despite the various
monetary regimes that have been adopted by the central bank of Nigeria over the
years, inflation still remains a major threat to Nigeria economic growth.
Nigeria has experienced high volatility in inflation rates. Since the early
197o, there have been four major episodes of high inflation, in excess of 30
percent. The growth of money supply is correlated with the high inflation
episodes because money growth was often in excess of real economic growth. However,
preceding the growth in money supply, some factors reflecting the structural
characteristics of the economy are observable. Some of there are supply shocks,
arising from factors such as famine, currency devolution and change in terms of
trade. By definition, price stability in Nigeria refers to the achievement of a
single digit inflation rate in an annual basis. Indeed, this objective has not
been achieved on a sustained basis. In 1995, the rate of inflation was 75.8
percent while the target of single digit inflation was achieved in only three
out of six between 1995 and 2000.
Inflation rate in Nigeria was last reported as 9.4
percent in July 2011 as against 10.20 percent in 2010. Inflation rate refers to
the general rise in price measured against a standard level of purchasing
power. The most well known measure of inflation is the consumer price index
(CPI) which measures consumer price and the GDP deflator which measurer
inflation in the while of the domestic economy. (IMF WEO).
Inflation affects different people differently. When
there is inflation, most prices are rising, but the rates of increase of
individual price differ much. The effect of inflation is explained on
redistribution of income and wealth, production and on the society as a whole. Inflation
redistributes income from wage earners and fixed income groups to profit
recipients and from creditors to debtors. On the other hand, when prices start
rising production is encouraged. They invest more in the anticipation of higher
profits in the future. This tends to increase employment, production and
income; which is only possible up to the full employment level. All this
reduces the efficiency of the 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.
RESEARCH METHODOLOGY
This chapter focuses on the research
method that will be adopted. The methodology to be adopted is the ordinary
least square (OLS) method of regression. Ordinary Least Square (OLS) is adopted
because of its simplicity and estimates obtained from this procedure have
optimal properties including Linearity, Unbaisedness, Minimum variance, zero
mean value of the random term, etc (Gujaati 2004).
SOURCE OF DATA
The data for this research project
is obtained from the following sources:
-
Central
Bank of Nigeria (CBN) statistical Bulletin for various years.
-
Central
Bank of Nigeria (CBN) Annual account for various years.
-
Central
Bank of Nigeria (CBN) Economic and financial Review for various years.
MODEL SPECIFICATION
In this
study, the hypothesis has been stated with the view of evaluating the impact of
monetary policy on price stability. In capturing the study, the following variable;
Inflation rate, money supply, interest rate and exchange rate are to be used as
proxy. Thus, the model is represented symbolically in its functional form as:
INF
= F (MS, INT, EXC) ------------- 3.1
Where
INF
= Inflation Rate
MS
= Money supply
INT
= Interest Rate
EXC
= Exchange Rate
Thus in view of the relationship between inflation
(dependent variable) and this macro – economic variable (i.e. independent
variable), we then structurally express the equation 3.1 in its mathematical
form and also introduce the stochastic element, Ut to take care of other variable that are not included
in our model. In a linear function, it is represent as follows,
INF = bo
+ b1 MS + b2 INT + b3 EXC + Ut ----------- 3.2
Where
bo = constant term/parameter intercept
b1, b2
and b3 = coefficients of
the parameters estimates.
Ut = Error Term
As effort will be made to rescale
the data, the log function is thus expressed as follow:
LOG
(INF) = bo + b1 LOG (MS) + b2 LOG (INT) + b3 LOG (EXC) + Ut
MODEL EVALUATION
At this level of research, using a
time series data, the research estimates the model with ordinary least square
method. This method is preferred to others as its best linear unbiased
estimator, minimum variance, zero mean value of the random term, etc
(Koutsoyiannis, 2001).
The tests that will be considered in
this study include:
(1)
Coefficient
of multiple determinations (R2)
(2)
Standard
Error test (S.E)
(3)
T
– test
(4)
F
– test
(5)
Durbin
Watson Statistics
Ø COEFFICIENT OF MULTIPLE DETERMINATIONS (R2):
It
is used to measure the proportion of variations in the dependent variables. The
higher the (R2), the
greater the proportion in the independent variables as brought about by the
independent variable and vice – versa
Ø STANDARD ERROR TEST (S.E): It is used to
test for the reliability of the coefficient estimates.
DECISION RULE:
If S.E < 1/2bi, reject the null
hypothesis and conclude that the coefficient estimate of the parameter is
statistically significant. Otherwise accept the null hypothesis.
Ø T – TEST: It is used to test for statistical
significance of individual estimate parameter. In this research, T – test is
chosen because the population variance is unknown and the sample size is less
than 30.
DECISION RULE
If T – cal > T –
tab, reject the null hypothesis and conclude that the regression coefficient is
statistically significant. Otherwise accept the null hypothesis.
Ø F – TEST: It is used to test for the joint
influence of the explanatory variable on the dependent variable
If F – cal > F – tab, reject the null hypothesis and conclude that
the regression plane is statistically significant. Otherwise, accept the null
hypothesis.
Ø DURBIN WATSON (DW): It is used to
test for the presence of auto – correlation (serial correlation).
DECISION RULE
If the computed Durbin Watson
statistics is less than the tabulated value of the lower limit there is
evidence of positive first order serial correlation. However, if it lies
between the upper limit, there is inconclusive evidence regarding the presence
or absence of positive first order serial correlation.