ABSTRACT
This study reviews the impact of monetary policy on Nigeria’s
economic growth between the periods of 1980 to 2010. The main objectives of
this study are to assess the effectiveness of the monetary policies in Nigeria, to evaluate the impact of monetary
policy on Nigeria
economic growth. The methodology used
was the ordinary least square (OLS) regression technique (OLS), etc. Some statistical tests like coefficient of
multiple determination, t-test standard error test, F–test and Durbin Watson
test were used. Going by the regression result, it was found that monetary
policy has significant impact on the Nigerian economic growth within the period
under study. Based on this, the study recommended that monetary authority in
Nigeria should apply discretion in implementing some of their policies in order
to improve the growth of the economy.
TABLE OF CONTENTS
Title Page i
Approval ii
Dedication iii
Acknowledgment iv
Table of Contents v
Abstract vii
CHAPTER ONE: Introduction
1.1
Background of the Study 1
1.2
Statement of the Problem 3
1.3
Objective of the Study 6
1.4
Significance of the Study 6
1.5
Hypothesis of the Study 6
1.6
Scope/ Limitations of the Study 7
CHAPTER TWO: Literature Review
2.1
Theoretical Literature 8
2.1.1 Goals of Monetary Policy 11
2.1.2 Types of Monetary
Policy 12
2.1.3 Instruments of Monetary
Policy 13
2.1.4 Monetary Theories 15
2.2
Empirical Literature 19
2.2.1 Constraints of monetary
Policy Management in Nigeria 23
2.2.2 Analysis and Appraisal of
Monetary Development during the
structural adjustment
programme 26
2.2.3 The Post Sap Era 28
CHAPTER THREE: Research Methodology
3.1
Model Specification 29
3.2
Model Estimation 30
3.3
Model Evaluation 30
3.4
Sources of Data 32
CHAPTER FOUR: Presentation and Analysis
of Results
4.1
Presentation of Result 33
4.2
Analysis of Results 33
4.3
Test of Hypothesis 35
4.4
Implication of the Study 36
CHAPTER FIVE: Summary, Conclusion and
Recommendation
5.1
Summary of the Findings 37
5.2
Conclusion 38
5.3
Recommendation 39
Bibliography 40
Appendix I
Appendix II
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Monetary
policy as a technique of economic management to bring about sustainable
economic growth and development has been the pursuit of nations and formal
articulation on how money affects economic aggregates.
In Nigeria,
monetary policy has been used since the central bank of Nigeria was saddled
with the responsibility of formulating and implementing monetary policy by the
(C.B.N act of 1988) since its establishment in 1959, the central bank of
Nigeria has continued to play the traditional role expected for a central bank,
which is the as to promote the social welfare (Ajayi, 1999) this role is
anchored on the use of monetary policy that is usually targeted towards the
achievement of full employment equilibrium, rapid, economic growth price stability
and external balance. This role by the central bank of Nigeria has
facilitated the emergence of active money market where treasury bills, a
financial instrument used for open market operations and raising debt for
government has grown in volume and value becoming a prominent earning asset for
investors and source of balancing liquidity in the market.
Over
the years, the major goals of monetary policy have often been the two later
objectives thus: inflation targeting and exchange rate policy has dominated CBN
monetary policy focus based on assumption that there are essential tools of
achieving macro economic stability the economic environment that guided
monetary policy before 1986 was characterized by the dominance of the oil
sector, the expanding role of the public section in the economy and over
dependence on the external sector in order to maintain price stability and a
healthy balance of payment position, monetary management depended on the rise
of direct monetary instruments 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
instrument was not feasible at that point because of the underdeveloped nature
of the financial markets and the deliberate restraint on interest rates.
The
most popular instrument of monetary policy was the issuance of credit rationing
guidelines, which primarily set the rate of charge for the component and
aggregate commercial bank loans and advances to the private sector.
In
general terms, monetary policy refers to a combination of measures designed to
regulate the supply and cost of money in an economy in consonance with the
expected level of economic activity.
However
an unstable or crisis ridden financial sector will render the transmission
mechanism of monetary policy less effective, (the transmission mechanism of
monetary policy is a channel through which monetary policy affects and
maintenance of strong macroeconomic fundamental difficult. This is because it
is only in a period of price stability that investors and consumers can
interpret market signals correctly: typically in periods of high inflation, the
horizon of the investors is very short and
resources of the investors are short also their resources are diverted
from long-term investment to those with immediate returns and inflation hedges
including real estate and currency speculation it is on this background that
this study would investigate the effectiveness of monetary policy in Nigeria
with special focus on major growth components.
1.2 Statement of the Problem
Ensuring
rapid economic growth is the major macroeconomic goal of every economy.
Economic growth is simply defined as a quantitative increase in a country
output of goods and services (Onwukwe, 2003).
Monetary
policy is of importance to every developing nation. But despite the various
monetary regimes that have been adopted by the central Bank of Nigeria has
experienced high volatility in inflation rates. Since the early 1970’s there
have been four major episodes of high inflation in excess of 30 percent. The
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 these are supply shocks; arising from
factors such as famine, currency devaluation and changes in terms of trade.
The
first period of inflation in the 30 percent range was in 1976. One of the
factors often adduced for this inflation is the drought in Northern
Nigeria, which destroyed agricultural production and pursed up the
cost of agricultural food items, a significant increase in the proportion of
the average consumers budget. In addition, during this period, there was
excessive monetization of oil export revenue, which might have given the
inflation a monetary character.
In
the late 1980’s, following the structure adjustment programme, the effects of
wage increase created a cost push effect on inflation. In the long run, it was
the structural characteristics of the economy coupled with the growth in money
supply that translated these into permanent price increase. In 1984 inflation
peaked at 39.6 percent at a time of relatively little growth in the economy, at
that time, the government was under pressure from debtor groups to reach an
agreement with the international monetary fund, one of which was devaluation of
the domestic currency. The expectation that devaluation was imminent fuelled
inflation as prices adjusted to the parallel rate of exchange. Over the same
period, excess money growth was about 45 percent and credit to the government
had increased by over 70 percent. In other respects the case of the inflation
may also be adduced to the worsening terms of external trade experienced by the
country at that time. It is possible therefore, that Nigeria’s inflationary episodes
were preceding by structural or real factors followed by monetary
expansion.
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. Though initially the expansion was
financed by credit from the Central Bank of Nigeria, it was later sustained by
increasing oil revenue (occasioned by oil price increase following the Persion
Gulf War) that was not Sterilized. In addition, with the debt was repurchased
with new local currency Obligation. However, with the drastic monetary contraction
initiated by the authorities in the middle of 1989, inflation fell reaching one
of its lowest point in 1991, i.e 13 percent.
The
forth inflationary episode occurred in 1993, and persisted through the end of
1995. Though inflation gathered momentum towards the fail end of 1992, it
reached 57 percent by the end of 1994, the highest rates since the eighties,
and the end of 1995, it was 72.8 percent. As with the third inflation, it
coincided with a period of expansionary fiscal deficit and money supply growth.
The authorities found it too difficult to contain the growth of private sector,
domestic credit and bank liquidity, there has been a continuous fall in the
inflation rate since 1996 as a result of stringent monetary policies of the
central bank. It however, increased in 2001, 2003, 2004, 2005 and 2008 to 18.9
percent, 14 percent, 17 percent and 11 percent respectively.
For
this research to be worthwhile, the researcher is interested in these problems
such as:
v Does monetary policy have significant
impact on Nigeria’s
economic growth?
1.3 Objectives of the Study
The
main objective of this study is to assess the effectiveness of the monetary
policies in Nigeria.
However, the following specific objectives would also be achieved.
v To evaluate the impact of
monetary policy on Nigeria
economic growth..
1.4 significance of the Study
The
result of this research work will be beneficial to both financial and
non-financial institutions. It will help to give necessary information on the
policy options which the government of Nigeria should adopt to make the
economy friendly and attractive to foreign investors.
Furthermore,
the study will be significant to the private sector, foreign investors and as
well as the individuals, as it will inform them on the macroeconomic condition
of the country. Thus, this will help in their policy formulation.
Finally,
the study will be added to the already existing body of knowledge in the field
of economics.
1.5 Hypothesis of the Study
The
hypothesis to be tested are:-
H0: That
monetary policy does not have significant impact on the economic growth of Nigeria.
1.6 Scope/Limitations of the
Study
The economy is a large
component with lot of diverse and sometimes complex parts. This study will
cover all the facts that make up the monetary policy, but shall empirically
investigate the effect of the major ones. This study shall be restricted to the
period between (1980-2010).
Nevertheless, many
constraints were encountered in the course of this research work are;
Lack of relevant statistical data, some of the
data needed for this research work were
not in existence.
Time constraint has been a
limiting factor in research pursuance.
Finally, as a student of a
developing country, lack of fund poses a lot of problem towards achieving the
desired result.
CHAPTER TWO
LITERATURE
REVIEW
2.1 Theoretical Literature
Monetary policy got it’s from the works of
living fisher 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 price. However the role of money in an economy got further
elucidation from (Keynes, 1930 p.90) and other Cambridge economists who proposed that money
has indirect effect on other economic variables 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 in
money supply which generates increase spending, increase employment and
economic growth.
The
role of monetary policy which is of course influencing the volume, cost and
direction of money supply was effectively conversed by (Friedman 1968) whose
position is that inflation is always and everyone a monetary phenomenon while
recognizing in the short-run that increase in money supply can reduce
unemployment but also create inflation and so the monetary authorities should increase money supply with caution.
Many authors that have attained greater
heights in academics have continued to contribute to the growing literature on
monetary policy.
Ojo
(1992) stated the objectives of monetary policy from an integral part of the
overall macroeconomic objectives of a country such as maintenance of external
equilibrium, but that the pursuit of the objectives most of the time bring
about conflict with one another. For instance, the stimulation of employment
conflicts with price stability as both of them more in opposite directions. And
also when money supply is restricted in order to slow down inflation if not
well monitored, it may result to unemployment in the nation.
Onwukwe
(2003) says that monetary policy can be defined as the deliberate control (or
regulation) of money supply and/or rates of interest by the Central Bank to try
to effect a change in employment, inflation or balance of payment. He noticed
that monetary policy by controlling interest rates, could effect changes in the
capital account of a country’s balance of payment since relatively higher rate
of interest in one country will attract fund from other countries in the short
run. He concluded by saying that monetary policy and fiscal policy are among
the approaches to achieve economic growth.
Monetary
policy according to Iyoha (2004) is an attempt to achieve the national economic
goals of full employment without inflation, rapid economic growth and balance
of payment equilibrium through the control of the economy’s supply of money and
credit.
Obinna
(2008) says that monetary authorities can influence the value of money in a
number of ways: first, they can alter the mint parity that exist thereby
changing the official value of the currency in circulation. Secondly, they can
introduce a policy of exchange control whereby the values of money of domestic
currency can remain the same while the values of monetary units of major
trading parlous fluctuates. Thirdly, they can fake a formal step to set a new
and lower official quotations of the value of home currency in terms of other
currencies or gold.
Nwankwo
(1979) observed the various techniques of monetary policy also known as
monetary instruments. He separated them into two: the quantitative and
qualitative. The quantitative instrument includes open market operation,
special deposits variations in reserve requirement, discount rates and
stabilization securities while the qualitative instruments include moral
suasion and credit control. Nwankwo also stated, that not all the monetary
policy techniques have been employed in Nigeria. He agreed that although
the performance of commercial banks on credit controls have been satisfactory,
government increased its indebtness to the banking sector though advances and
loans for growth and development.
According
to Frenkel, Goldstain and Mason (1989), P. (187) “The goals of monetary policy
are often stated as price stability, full employment and sustainable economic
growth. To these may be added to the international goal of monetary policy”
stable exchange rates and balance trade. Thus Frenkel, Goldstain and Mason
concluded that. “the bottom line is that price stability is now widely regarded
as the principal priority for monetary policy.
According
to the Central Bank of Nigeria,
the objectives of monetary policy in Nigeria includes: stimulation of
economic growth, promotion of price stability, reduction of pressure on
external sector and the stabilization of the naira exchange rate.
2.1.1 Goals of Monetary Policy
The
following are the goals of monetary policy:
Full
Employment: According
to Keynes (1936), full employment means absence of involuntary unemployment. In
other words, full employment is a situation in which everybody who want to work
gets work.
Onwukwe
(2003), note that it is the desire of every good national government to provide
ample job opportunities for the citizenry. However it must be noted that full
employment does not mean that 100 percent of the labour force will be employed.
At any point in time there must be some level of unemployment co-existing with
unfilled vacancies in any particular economy. This happens because frictional
unemployment is unavoidable in any economy no matter how developed.
Price
Stability:
Onwukwe(2003), went further to say that this goal or objective has to do with
keeping inflation in check, that is controlling the rate at which prices of
goods and services increase over time. The goal of ensuring price stability is
desirable because of the evils associated with inflation.
Economic Growth: Economic growth can be defined as a
quantitative increase in a country’s output of goods and services. Achieving
economic growth is desirable to every growing economy.
Balance of
Payment Equilibrium: Generally countries try much as possible try to avoid deficit in
their balance of payment. By definition, balance of payment is a tabulation of
the credit and debit transaction of the country with foreign countries and
international institutions. The transactions are divided into current account
and capital account.
2.1.2 Types of Monetary Policy
In
practice, to implement any type of monetary policy the main tool used is
modifying the amount of base money in circulation. The monetary authority does
this by buying or selling financial assets (usually government obligations)
these open market operations change either the amount of money or its liquidity
(if less liquid forms of money are bought or sold) the multiplies effect of
fractional reserve banking amplifies the effects of these actions. Constant
market transactions by the monetary authority modify the supply of currency and
this impacts other market variables such as short term interest rates and
exchange rate.
The
distinction between the various types of monetary policy lies primarily with
the set of instruments and target variables that are used by the monetary
authority to achieve their goals.
However,
monetary policy can be expansionary or contractionary. According to Jhingan
(2003:619) an expansionary monetary policy is used to overcome a recession or a
depression or a deflationary gap.
Contractionary
monetary policy is a monetary policy that seeks to reduce the size of the
supply of money while expansionary monetary policy is a policy that seeks to
increase the size of the money supply.
2.1.3 Instruments of Monetary Policy
Discount Rate
This
is the rate at which the Central Bank and other depository institutions lend
money to the commercial banks. It represents the cost of borrowing by the
commercial banks from the Central Bank. This rate is usually set below short
term market rates. (T-bills). This enables the institutions to vary credit
conditions (the amount of money they have to loan out) thereby affecting the
money supply. It is of note that the discount rate is the only instrument which
the central banks do not have total control over.
Open Market
Operations (OMO)
Monetary policy can be implemented by
changing monetary base. Central Banks use (OMO) to change the monetary base.
They buy or sell reserve assets (usually financial instruments such as bonds)
in exchange for money on deposit at the central bank. Those deposit are
convertible to currency. Together such currency and deposits constitutes the
monetary base which is the general liabilities of the central bank and its own
monetary unit.
Reserve Ratio
The commercial banks have a statutory
obligation to have a defined ratio of their total deposit liabilities with the
central bank; Obinna (2008). If contractionary monetary policy is desired the
Central Bank raises the ratio of the reserve thereby forcing the commercial
banks to cut back on their lending activities and therefore their ability to
create money.
Moral Suasion
This consist of informal advice and appeal by
the central bank to the commercial banks about how they conduct their credit
policy and lending operations. The essence of this technique is persuading
rather than forcing the commercial bank to heed to the advice given by the central
bank.
Direct Control
of Banking System
This
involves the imposition of quantitative ceiling on the overall or sectoral
distribution of credit by central bank. This tool is selective not general, it
is direct. It can be used as a weapon for economic growth.
Direct
Regulation of interest Rate
The contraction of the monetary supply can be
achieved indirectly by increasing the normal interest rate. Monetary
authorities in different nations have different levels of control of economy.
However in Nigeria
interest rate are administered. It is fixed with both the deposit and the
lending rates and are expected to be maintained by the commercial banks.
2.1.4 Monetary
Theories
Monetary
theory is a set of idea or ideas on how monetary policy should be conducted
within an economy. Monetary theory suggests that different monetary polices can
benefit nations depending on their unique set of resources and limitations.
There
are three main schools of thought which have made major contributions to the
development of monetary theory. They are classical, Keynesian and Monetarist
theories.
However,
a brief review will be made on these schools of thought with respect to
economic growth.
The Classical
Economists
The classical economist view of monetary
policy is based on the quantity theory of money. According to this theory an
increase (decrease) in the quantity of money leads to a proportionate increase
(decrease) in the price level. The quantity theory of money is usually
discussed in terms of the equation of exchange which is given by the
expression.
MV = PT
Where
M = stocks of money
V = velocity of circulation
P = price level
T = volume of transaction
The
equation states that the money supply MV equals the total value of output PT in
the economy. The classical interpretation of the equation is however
interesting. They view the equation as an explanation of the behaviour of the
price in response to a change in money supply since they believe in the
operation of market forces, they held the view that only deviation from full
employment equilibrium is abnormal and would be taken care of in the long run.
They assumed a constant (T) in the sense that if output is not at full
employment level, price adjustment would automatically restore equilibrium,
regarding (V) as relatively stable. The classicalist obtained a direct
relationship between the money supply and the general price level. (Expo and
Osakwe 1997:93).
The Keynesian
Economists
Keynesian economist do not believe in the
direct link between the supply of money and the price level that emerges from
the classical quantity theory of money. They reject the notion that the economy
is always at or near the natural level of real GDP so that the level of current
real GDP can be regarded as fixed. They also reject the proposition that the
velocity of circulation of money is constant and can cite evidence to support
their case.
Keynesian
do believe in an indirect link between the money supply and real GDP. They
believe that expansionary monetary policy increases the supply of loanable fund
available through the banking system, causing interest rates to fall. With
lower interest rates, aggregate expenditure on investment and interest.
Sensitive consumption goods usually increase causing real GDP to rise. Hence,
monetary policy can affect real GDP indirectly.
Keynesians,
however remain skeptical about the effectiveness of monetary policy they point
out that expansionary monetary policies that increases the reserves of the
banking system need not lead to a multiple expansion of the money supply
because banks can simple refuse to lend out their excess reserves. Furthermore,
the lower interest rate that results from an expansionary monetary policy need not induce an increase in aggregate
investment and consumption expenditure because firms and households demands for
investment and consumption goods may not be sensitive to the lower interest
rates. For these reasons, Keynesian tend to place less emphasis on the
effectiveness of monetary policy and more emphasis on the effectiveness of
fiscal policy which they regard as having a more direct effect on GDP.
(Transmission mechanism of monetary policy: Journal of Economic studies volume
31 issue 5:2004)
Monetary View
of Monetary Theory
During and after world war II, inflation
replaced depletion as a major economic problem facing many western industrial
countries. Keynesian economics failed to explain the emergency of high and
sustained level of inflation and unemployment; this lead to the rebirth of the
old notion that monetary management was the key to economic stability. The
intellectual leadership of the monetarist was provided by Milton Friedman of
the university of Chicago through his seminal contribution to the
quantity theory of money – a restatement in M. Friedman studies in the quantity
theory of money and a monetary history of the US 1867-1960 with A. J. Schwarz.
Monetarist argued that disturbances within the monetary sector are the
principal cause of instability in the economy. Monetarist argued that the economy
is basically or inherently stable and government principal economic role in
stabilization should consist in providing for orderly and systematic expansion
of money supply according to fixed policy rates. Such fixed policy rules in the
view of the monetarist, are necessary to insulate the economy against ill
conserved and badly timed government actions which leads to instability.
(Friedman, Milton
quotes, Wikiquote)
2.2 Empirical Literature
In
August 1996, delivering a paper during the meeting of the secretary to the
government of the federation with federal government… “on money supply,
inflation and the National Economy” Ogwuma (1996) maintains that inflationary
developments have obviously had so many negative consequences on the economy.
He explained this by stressing that when inflation increased from 7.4 percent
in 1990 to 67.2 percent in 1993, the growth in economic activities reflected in
the movement of the GDP, as it declined from 22.3 percent to 8 percent. These
goes to confirm the emerging consensus that high inflation tend to engender low
economic growth timely.
Udabah
(1998) on “The evolution of the effectiveness of monetary policy in the
Nigerian economy” covering the period of 1995 to 1997 came up with the result
that the monetary policy instruments used by the central bank contributed
significantly in achieving some degree of macroeconomic goal. To always achieve
effective result, the central bank should “fine tune” that instruments.
Samuelson
(1967) leading a research on the theory of stabilization policies deserves much
attention in this research study. His focus was on interest and capital. He
established that a combination of monetary and fiscal policies plays a vital
role in not only stabilizing an economy but determines the rate of capital
growth. In the course of his analysis, Samuelson recommended the adoption of
tight fiscal and easy monetary policies as well as easy fiscal and tight
monetary polices for economic stabilization. However, he cautioned that either
of the above is a function of the economic peculiarities of the country in
question. He used graphical illustration of the two policies. As shown below:
In
fig (a) and (b) he explains that a combination of monetary and fiscal policies
are the determinations of rate of capital growth. When capital growth takes
place in any economy, the society is bound to build up quickly and achieve the
basis of macroeconomic desires, (like full employment, increasing productivity
and favourable balance of payment).
According
to him, by tightening fiscal and easing monetary policies, the economy attracts
full employment of savings and investments at E0. on the other hand,
when the second economy uses easy fiscal policy (like low taxes) put at par
with tight monetary policy, the resultant effect is a low saving and investment
at equilibrium of E1.
Finally,
he postulated that low saving and investment matches with high consumption,
which does not augur well for a smooth growth of the economy. It is important
to stress at this juncture that, whichever angle an economy approaches this
policy, two problems are certain to arise, either inflation or declining
productivity.
Odedokwe
(1998), studied the impact of fiscal variables, monetary variables and
composition of financial aggregate on the Nigerian economy, he concluded that
monetary and credit policies are more effective on economic growth performance
than fiscal policy.
Paul
(2004), further studied the impact of monetary and fiscal policies along with
their implications on the economic growth performance especially during the
periods of inflation and depression and came up with the following summarized
views:
i.
The extreme Keynesian and monetarist views are partial, one sided and
contains half truth. Both approaches deals with a particular phase of trade
cycle in a capitalist economy.
ii.
Keynesian view is more suitable. During the phase of depression it is
useful in forecasting changes in income level when the economy is experiencing
depression.
iii.
Monetarist view works in the inflationary phase. It helps in
forecasting changes in income level in inflationary situation.
Finally, he concluded that
monetary and fiscal polices ought to be complementary to each other, each
operating in the province in which it is most effective.
Anderson and Jordan (1968),
studied also the empirical relationship between the measures of fiscal and
monetary actions of government and total spending. These relationship were
studied by regressing quarterly changes in gross national products on quarterly
changes in money stock and in the various measures of fiscal action. Also
similar studies were conducted using the monetary base instead of the money
stock. However, the result of these studies inferred that monetary policy is
more dependable in the drive towards economic stabilization.
Uchedu (1995) investigated
the effect of monetary policy on the performance of commercial banks in Nigeria. He
employed a theoretical framework including port-folio management theory, the
statistical model and production function technique. He developed a modified
model to identify the impact of some selected monetary policy variables on
commercial banks performance in the period (1970-1973). He used the ordinary
that square (OLS) single equation procedure. He found out that interest rate is
a major source of changes in commercial bank’s performance. However, banks
reserve was found to have positive effect on banks profitability while exchange
rate had negative effects on banks profitability.
2.2.1 Constraints of Monetary Policy Management in Nigeria Fiscal
Dominance
Fiscal
dominance has militated against the effective implementation of monetary policy
in Nigeria.
Fiscal dominance is characterized by a monetary authority whose polices have
been totally subordinated to the government. All outstanding debt is backed by
the monetary authority in the form of current and future seigniorage revenues
or that part of revenues accruing to the government through the creation of
money (as in quantitative easing). A case of complete fiscal dominance would
compel the monetary authority to fully accommodate the fiscal authority
whenever a budget deficit is financed with debt.
By
definition, fiscal dominance impedes the effective implementation of any
monetary strategy aimed at controlling inflation. Monetary policy is forced to
turn its strategy around because it has to ensure fiscal solvency to prevent a
catastrophe. In order to generate seignorage revenues. Clearly applying what is
considered “normal” monetary policy when there is a regime of fiscal dominance
therefore risks aggravating not just the fiscal situation but inflation
dynamics too. Under fiscal dominance, however, it will likely only made an
aggressive pursuit of the inflation target more likely and therefore more
disruptive.
Data
Poor
quality of data is constraint in formulating monetary policy in Nigeria. The
lack of high frequency and reliable data renders econometric analysis
difficult.
Oligopolistic
Banking System
In Nigeria the
money market is oligopolistic in nature and this prevents timely adjustments to
financial and exchange rate changes.
In
Oligopholy you see things being done contrary to the notion of a free market.
In the oligopolistic banking system in Nigeria, the biggest banks control
a large and large share of deposits. In essence, very few large banks control
the preponderance of the liquidity in the banking system. Thus dictate the
interest rates in the market irrespective of the central bank of Nigeria’s
manipulation of the minimal anchor discount rate of the MRR.
Dualistic
Financial and Produce Markets
The
existence of large informal credit market and exchange rate market in Nigeria has
many implications on the transmission mechanism of monetary policy. For
instance, a divergence between the official and parallel market exchange rates
induces in the short-run, a chain of speculative activities, which invariably
undermine the efficiency of monetary policy instrument.
Persistent
Liquid Overhead
Among
less developed countries, Nigeria
had the elevent largest external public debt in 1989 9and the largest among sub
Saharan countries). (Nigerian index).
The
country faces persistent difficulties in serving its debt, in 1980’s debt
rescheduling was almost continuous. The secondary market price of Nigeria’s bank debt in mid 1989 was only 24 cent
on the dollar, indicating the markets were heavily discounting the probability
that Nigeria
would pay its external debt.
Despite
several debt rescheduling in the 1980’s and 1990’s, Nigeria’s debt over hang continued
to dampen investment.
Nigeria’s
highly oligopolistic money markets, financial repression of interest rates and
exchange rates and sluggish expansion in response to improved prices in export
and import substitution industries prevented timely adjustment to financial and
exchange rate changes.
Policy
Inconsistencies
This
describes a situation where a decision maker’s preferences change over time in
such a way that what is preferred at one point in time is inconsistent with
what is preferred at another point in time.
In Nigeria,
policy inconsistence has always being a problem for instance, we have cases
where projects, policies and programmes were abandoned.
The
continuity of programmes and policies as hindrances to monetary policy
implementation is blamed on the inconsistencies in the policy makers.
2.2.2 Analysis
and Appraisal of Monetary Development during the Structural Adjustment Programme
Monetary growth was significantly restrained
in 1986 and 1987, but virtually expanded in 1988 following the reflationary
budget of that year. Therefore, money stock growth moderated in 1989 but
escalated again in 1990 owing to significant external inflow following increase
prices of petroleum products.
Monetary
expansion became more rapid between 1991 and 1994 because of the corresponding
increase in the monetary base. Narrow money (MI) declined by 4.5 percent in 1986
as against the 9.1 percent increase in 1985. contraction in narrow money was
attributed largely to the transfer of #4.2 billion to CBN from banks being
naira lodgments for foreign payments arrears which the CBN could not effect due to foreign due to
foreign exchange scarcity.
Monetary
restraint weakened somewhat in 1987 following an increase in the fiscal deficit
which was partly sourced from the banking system. Consequently, M1.
Rose by 17.3 percent, exceeding 11.8 percent target for the year. In an attempt
to moderate an excess in money growth, CBN increased the liquidity ratio from
25.0 to 30.0 percent, deregulated interest rates and increased its minimum
rediscount rate from 13.0 to 15.0 percent so as to make funds more expensive
and thereby discourage marginal borrowers. However, in response to the
reflationary budget of 1988, the monetary authorities lewered the liquidity
ratio, reduced he minimum rediscount rate to 12.75 percent 15 percent and
increase the credit growth target to the domestic economy from 4.4 percent in
1987 to 1.1 percent in 1988.
As
a result of the policy slippage in 1988 and the subsequent increase in budget
deficit and the monetary aggregates, the monetary authorities tightened up
monetary policy in 1989. It therefore, increase the rediscount rate from 12.75
percent to 18.5 percent, increased the cash ratio, raised the liquidity ratio
for banks to 30.3 percent, adjustment the capital adequacy ration from 1.12 to
1.10 and ordered the transfer of public sector deposits in banks to CBN, when
this was discovered to the source of liquidity pressure. These concretionary
measures impacted on the money supply as the expansion of M1
moderated from 42.3 percent in 1988 to 21.2 percent in 1989. in 1990, M1
Rose again by 44.7 percent, largely due to the significant foreign exchange
inflow form the increase in petroleum prices.
In
spite of intense pressure in the financial sector, the CBN introduce the use of
open market operations (OMOs) as a tool of monetary control in just 1993, while
it gradually dismantled the direct credit controls.
In
1994, the volume of OMOs, expanded significantly although its upward direction
was threatened by the sudden policy changes announced in the 1994 budget. An
example of such changes was the capping of interest rates which brought down
the yield of treasury bills for OMOs to 12.4 percent. Even with a slightly high
average filed in 1995, the volume of OMO transactions was down compared to
1994. on the whole, the OMO instrument was quite useful in checking the growth
of bank reserve during the period. Hence, the increased level of band and
doubtful debts substantial erosion of the general downturn of the economy
resulted in the increase incidence of financial distress in the economy.
2.2.3 The Post
SAP Era
This
era witnessed a brief period of renewed regulation and the period of guided
deregulation. The deregulatory approach brought about increased number of
players far beyond what could be effectively managed by the CBN. As a result,
the financial institution faced serious waves of distress that caused crisis of
confidence in the industry. The CBN in collaboration with NDIC has since 1994
intensified efforts towards achieving a healthy operating environment for the
financial services sector.
However,
the post SAP period that started from 1994 was faced with some degree of
regulations in monetary activities.
CHAPTER
THREE
RESEARCH METHODOLOGY
3.1 Model
Specification
In this study, hypothesis has been
stated with the view of examining the impact of monetary policy on economic
growth of Nigeria.
In capturing the study, these variables were used as proxy. Thus, the model is
represented in a functional form. It is shown as below:
RGDP = F (MS, INT)…………. 1.1
Where
RGDP = Real Gross Domestic Product (Dependent
variable)
MS = Money
Supply (Independent variable)
INT = Interest rate (Independent variable)
In a linear function, it is
represented as follows,
RGDP = b0 +
b1MS + b2INT + Ut ……………1.2
Where
b0 = Constant term
b1 = Regression coefficient of MS
b2
= Regression coefficient of INT
Ut = Error Term
3.2 Model
Estimation
As
the data for the analysis is obtained, the next task is to estimate the
parameters of the function. The numerical estimates of the parameters give the
empirical content of the function specified. Regression analysis based on the
classical linear regression model, otherwise known as Ordinary Least Square
(OLS) technique is chosen by the researcher for the analysis.
3.3 Model
Evaluation
At this level of research, using a
time series data, the researcher estimates the model with ordinary least square
method. This method is preferred to others as it is best linear unbiased
estimator, minimum variance, zero mean value of the random terms, etc
(Koutsoyiannis 2001).
The
tests that will be considered in this study include:
Coefficient of
multiple determination (R2 )
Standard Error
test (S.E)
T-test
F-test
Durbin Watson
Statistics
Coefficient of
Multiple Determination (R2 ): It is used to measure the proportion
of variations in the dependent variable which is explained by the explanatory
variables. The higher the (R2 ) the greater the proportion of the
variation in the independent variables.
Standard Error
test (S.E): It is used to test for the reliability of the coefficient
estimates.
Decision Rule
If S.E < 1/2b1,
reject the null hypothesis and conclude that the coefficient estimate of
parameter is statistically significant. Otherwise accept the null hypothesis.
T-test: It is used to test for the statistical
significance of individual estimated 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.
F-test: It is used to test for the joint
influence of the explanatory variables on the dependent variable.
Decision Rule
If F-cal >
F-tab, reject the null hypothesis and conclude that the regression plane is
statistically significant. Otherwise accept the null hypothesis.
Durbin Watson (DW): It is used to test for the
presence of autocorrelation (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. If it is
greater than the upper limit there is no evidence of positive first order
serial correlation. However, if it lies between the lower and upper limit,
there is inconclusive evidence regarding the presence or absence of positive
first order serial correlation.
3.3 SOURCES OF DATA
The data for this research project
is obtained from the following sources:
- Central Bank
of Nigeria Statistical Bulletin for various years.
- Central Bank
of Nigeria Annual Account for various years.
- Central Bank
of Nigeria Economic and Financial Review for various years.
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULTS
In
the model estimation, variables used are Real Gross Domestic Product (dependent
variable) and the explanatory variables; Money Supply (MS) and Interest Rate
(INT). It covers the period of years 1980-2010.
4.1 Presentation
of Results
This research work employed
the use of multiple regression model based on Ordinary Least Square (OLS)
method.
Modeling RGDP by OLS
Log(RGDP)
= 9.108 + 0.237 Log(MS) + 0.221 Log(INT)
T* =
(17.965) (9.150) (1.470)
S.E = (0.507) (0.026) (0.150)
t0.025 = 2.048
F (2,
28) = 42.41
F0.05
= 3.34
R2 = 0.751813
DW = 1.3
4.2 Analysis of Results
Z-test: It is used to test for the
statistical significance of the individual estimated parameters. The calculated
Z-value for the regression coefficients of Log(MS) and Log(INT) are 9.150 and
1.470 respectively. The tabulated t- value is 2.048. Since the calculated
t-value of Log(MS) is greater than the tabulated t-value at 5% level of
significance; we conclude that the regression coefficient is statistically
significant. However, the calculated t-value of Log(INT) is less than the
tabulated t-value. Therefore, its estimated parameter is statistically
insignificant.
Standard
Error test: It is used to test for statistical
reliability of the coefficient estimates.
S(b1) = 0.026 S(b2) = 0.150
b1/2=
0.119 b2/2 =
0.111
Since S(b1) < b1/2,
we conclude that the coefficient estimate of S(b1) is statistically
significant. However, S(b2) > b2/2, hence
its coefficient estimate is not
statistically significant.
F-Test: This is used to test for
the joint influence of the explanatory variables on the dependent variable. The
F-calculated value is 42.41
while the F-tabulated
value is 3.34 at 5% level of significance. Since the F-calculated value is greater than the F-tabulated value, we
conclude that the entire regression plane is statistically significant. This
means that the joint influence of the explanatory variables (MS and INT) on the
dependent variable (RGDP) is statistically significant.
Coefficient of
Multiple Determination (R2): It is used to measure the proportion of variations in
the dependent variable, which is accounted for or explained by the explanatory
variables. The computed coefficient of multiple determination (R2 = 0.751813) shows that 75.18% of the
total variations in the dependent variable (RGDP) is accounted for, by the
variation in the explanatory variables namely Money Supply (MS) and Interest
Rate (INT) while 24.82% of the total variation in the dependent variable is
attributable to the influence of other factors not included in the regression
model.
Durbin Watson statistics: It is used to
test for the presence of positive first order serial correlation. The computed
DW is 1.3. At 5% level of significance with two explanatory variables and 31
observations, the tabulated DW for dL and du are 1.297 and 1.570 respectively. The value of
DW is lies between the lower and upper limits of the tabulated Durbin Watson
statistics. Therefore, we conclude that there is inconclusive evidence
regarding the presence or absence of positive first order serial
correlation.
4.3 Test of Hypothesis
The researcher evaluates the
impact of monetary policy on the Nigeria’s economic growth. With
respect to this, the null hypothesis is stated as follows;
H0: Monetary policy does not have
significant impact on the Nigeria’s
economic growth.
F-test
is employed in testing the hypothesis. This test will help to capture the
joint influence of the explanatory
variables on the dependent variable.
Decision Rule
If F-cal > F-tab, reject the null
hypothesis otherwise accept the null hypothesis. Using 5% level of significance
at 2 and 28 degrees of freedom, the tabulated F- value is 3.34 while calculated
F-value is 42.41. Since the calculated F-value is greater than the
tabulated F-value at 5% level of significance; we reject the null hypothesis
and conclude that monetary policy has significant impact on the Nigeria’s
economic growth.
4.4 Implication
of the Result
The regression result above shows
that monetary policy has significant impact on the Nigeria’s economic. It is estimated
from the result that 1% increase in Money supply (MS) and Interest rate (INT)
will, on the average lead to increase by 0.24% and 0.22% in Real Gross Domestic
Product (RGDP) respectively. Moreover, when holding the explanatory variables
constant, RGDP increases by 9.11%. The sign borne by the parameter estimates
are in conformity with the economic a priori expectation. In a nutshell, if
money supply increases, RGDP will as well increase. The result can be likened
to Ghatak (1995), which states “there is a systematic relationship between
money and economic growth”.
More so, it is seen that there is a
positive relationship between RGDP and interest rate. Government may use
increase in interest rate to cushion the effect of inflation which may arise
owing to continuous increase in the money supply in the long run. Thus, monetary
policy is an important tool that contributes to economic growth in Nigeria.
CHAPTER FIVE
SUMMARY,
CONCLUSION AND POLICY RECOMMENDATION
5.1 Summary of Findings
This research work evaluates
the impact of monetary policy on Nigeria’s economic growth. Monetary
policy was captured using Money Supply (MS) and Interest Rate (INT) while the
economic growth was captured with Real Gross Domestic Product (GDP).
Considering the statistical
techniques employed, the following results were obtained;
(i)
Monetary policy has significant impact on Nigeria’s economic growth
(ii)
The entire regression plane is statistically significant. This means
that the joint influence of the explanatory variables (MS and INT) on the
dependent variable (RGDP) is statistically significant;
(iii)
The computed coefficient of multiple determination shows that 75.18% of
the total variations in the dependent variable (RGDP) is accounted for, by the
variation in the explanatory variables namely Money Supply (MS) and Interest
Rate (INT).
(iv)
The total variation of 24.82% in the dependent variable is attributable
to the influence of other factors not included in the regression model.
(v)
There is inconclusive evidence regarding the
presence or absence of positive first-order serial correlation (autocorrelation).
5.2
Conclusion
In
the era of an ever-changing global economic environment, especially now that
the current economic approach of most countries is gearing towards transforming
their system for rapid and sustained economic growth, Nigeria cannot be left out. Thus,
this work examines the effect of monetary policy on Nigeria’s economic growth. It is
found that monetary policy has significant impact on the Nigeria’s economic growth within
the period under study; 1980-2008.
One important macroeconomic variable like
interest rate can be tackled with monetary policy, its manipulations are very
important to our economic growth. Hence, monetary policy is used to induce
investment through changes in money supply and interest rate. However, the
failure of monetary policy in achieving its target could not be used as a
ground to judge against the use of monetary policies rather those limitations
and constraints should be dealt with. Conclusively, monetary policy has
contributed significantly to economic growth in Nigeria.
5.3 Recommendations
Sequel
to the researcher’s findings, the following recommendations are presented;
·
In the bid to achieve economic growth,
monetary authority in Nigeria
should apply discretion in implementing some of their policies in order to
improve the growth of the economy.
·
CBN should exercise influence that would
affect the behaviour of monetary aggregates namely money supply, interest rate,
bank credit etc in the overall liquidity of the economy.
·
Monetary policy should be used to fight
against high rate of inflation in the country in order to actualize economic
growth.
·
CBN should endeavor to improve on the
deteriorating value of Naira in the international market.
·
Government should strive to strengthen the
financial system for easy implementation of monetary policy.
·
There is need for a suitable interest rate
policy through minimum rediscount rate. The CBN should engage in direct
regulation of interest rates.
BIBLIOGRAPHY
Andersen, K. and Jordan, M. (1968). “A monetarist
Model of Economic Stabilization”. Federal
Reserve bank of St. Louise Monthly Review: April No.52
Anyanwu, J. C. (1993), Monetary Economics Theory, Policy
and Institutions .Hybird Publishers,
Onitsha Nigeria.
CBN (2009) Statistical Bulletin, Volume 20.
Deleeuw, F. and Kalchbrember, J. (1969) “Monetary
and Fiscal Actions, a Test of their Relative
Importance in Economic Stabilization. “Federal Reserve Bank of St. Louis
Monthly Review No.39 April.
Freidman, M. (1948), “A Monetary and Fiscal
Framework for Economic Stability.” American
Economic Review 38 (3), pp. 245-264.
Friedman, M. and Meiselman, E. M (1963), The
Relative Stability of Monetary Policy Commission
on Money and Credit Prentice Hall, Engle Wood Ciffs, New Jessey.
Isiwu, D. G. (2004), Fundamental of Thesis History in Economics. Enugu
Africa Links Books.
Iyoha, A. M. (2004), Macroeconomist: Theory and
Policy. Benin,
Mindex Publishing.
Jhingan, L. M. (2003), Macroeconomic Theory. 11th Revised Edition, India
Vrinda Publishers (p) Ltd.
Keynes, J. (1936), The General Theory of Employment, Interest and
Money. Macmillan Press.
Koutsoyiannis, A. (1997), Theory of Econometrics, New York, Plagrave
Publishers.
Nwabuoke P. O. (2001), Fundamentals of Statistic. Enugu,
Koruma Books
Nwankwo F. D. (1982), Nigerian Financial System:
Macmillan Publishers Ltd.
Odedokun O. E. (1988), The Impact of Fiscal
Variable, Financial Variables and Composition of
Financial Aggregate on Nigerian Economy.
Ogwuma P. A. (1996), “Money Supply, Inflatin and the
Nigerian Economy.” Economic and Statistical
Review. Vol. 20 No. 3 July/September.
Ojo, M. O. (2000), Fiscal and Monetary Policy During
Structural Adjustment in Nigeria.
African Economic Research Consortium
(CAERC), Central Bank of Nigeria’s
Publication.
Onwukwe, N. M. (2003), Fundamentals of
Macroeconomics. Abakaliki Press, Well
Press Limited.
Paul, R. R. (2004), Money Banking and International Trade, Kayami Publishers, Indhiana,
New
Delhi, Noida (up).
Samuelson, P. A. (1976), Economics. New York: Irwin,
McGraw-Hill Publishers Ltd.
Taylor, B. J. (2004), Improvement in Monetary Policy
and Implications for Nigeria.
CBN Publications May, 2004.
Uchendu, O. A. (1996), “The Transmission of Monetary
Policy in Nigeria.”
Central Bank of Nigeria
Economic and Financial Review vol. 34, No.2 p. 608.
Udabah, S. I. (1998), “An Evaluation on the
Effectiveness of Monetary Policy in Nigeria”. ESUT Journal of Economics Studies.
APPENDIX I
DATA FOR
REGRESSION
|
YEAR
|
RGDP
(
|
MS
(
|
INT
(%)
|
|
1980
|
31,546.76
|
11,856.60
|
6.5
|
|
1981
|
205,222.06
|
14,471.17
|
6.5
|
|
1982
|
199,685.25
|
15,786.74
|
8
|
|
1983
|
185,598.14
|
17,687.93
|
8
|
|
1984
|
183,562.95
|
20,105.94
|
10
|
|
1985
|
201,036.27
|
22,299.24
|
10
|
|
1986
|
205,971.44
|
23,806.40
|
10
|
|
1987
|
204,806.54
|
27,573.58
|
15.8
|
|
1988
|
219,875.63
|
38,356.80
|
14.3
|
|
1989
|
236,729.58
|
45,902.88
|
21.2
|
|
1990
|
267,549.99
|
52,857.03
|
23
|
|
1991
|
265,379.14
|
75,401.18
|
20.1
|
|
1992
|
271,365.52
|
111,112.31
|
20.5
|
|
1993
|
274,833.29
|
165,338.75
|
28.02
|
|
1994
|
275,450.56
|
230,292.60
|
15
|
|
1995
|
281,407.40
|
289,091.07
|
14.27
|
|
1996
|
293,745.38
|
345,853.96
|
13.55
|
|
1997
|
302,022.48
|
413,280.13
|
7.43
|
|
1998
|
310,890.05
|
488,145.79
|
10.09
|
|
1999
|
312,183.48
|
628,952.16
|
14.3
|
|
2000
|
329,178.74
|
878,457.27
|
10.44
|
|
2001
|
356,994.26
|
1,269,321.61
|
10.09
|
|
2002
|
433,203.51
|
1,505,963.50
|
15.57
|
|
2003
|
477,532.98
|
1,952,921.19
|
11.88
|
|
2004
|
527,576.04
|
2,131,818.98
|
12.21
|
|
2005
|
561,931.39
|
2,637,912.73
|
8.68
|
|
2006
|
595,821.61
|
3,797,908.98
|
8.26
|
|
2007
|
634,251.14
|
5,127,400.70
|
9.49
|
|
2008
|
672,202.55
|
8,008,203.95
|
11.95
|
|
2009
|
718,977.33
|
9,411,112.25
|
13.23
|
|
2010
|
776,332.21
|
11,034,940.93
|
7.58
|
SOURCE: CBN STATISTICAL
BULLETIN VOLUME 21, 2010
APPENDIX II
REGRESSION RESULTS
|
Dependent Variable: RGDP
|
|
|
||
|
Method: Least Squares
|
|
|
||
|
Date: 05/19/13 Time:
12:43
|
|
|
||
|
Sample: 1980 2010
|
|
|
||
|
Included observations: 31
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
Coefficient
|
Std.
Error
|
z-Statistic
|
Prob.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
|
227454.1
|
42798.78
|
5.314499
|
0.0000
|
|
MS
|
0.057497
|
0.005272
|
10.90525
|
0.0000
|
|
INT
|
2124.729
|
2922.623
|
0.726994
|
0.4733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-squared
|
0.813717
|
Mean
dependent var
|
348802.1
|
|
|
Adjusted R-squared
|
0.800412
|
S.D.
dependent var
|
182663.1
|
|
|
S.E. of regression
|
81605.34
|
Akaike
info criterion
|
25.54894
|
|
|
Sum squared resid
|
1.86E+11
|
Schwarz
criterion
|
25.68772
|
|
|
Log likelihood
|
-393.0086
|
Hannan-Quinn
criter.
|
25.59418
|
|
|
F-statistic
|
61.15464
|
Durbin-Watson
stat
|
0.326614
|
|
|
Prob(F-statistic)
|
0.000000
|
|
|
|
|
|
|
|
|
|
|
Dependent Variable: LOG(RGDP)
|
|
|
||
|
Method: Least Squares
|
|
|
||
|
Date: 05/19/13 Time:
12:44
|
|
|
||
|
Sample: 1980 2010
|
|
|
||
|
Included observations: 31
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
Coefficient
|
Std.
Error
|
z-Statistic
|
Prob.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
|
9.107860
|
0.506970
|
17.96530
|
0.0000
|
|
LOG(MS)
|
0.237067
|
0.025909
|
9.150073
|
0.0000
|
|
LOG(INT)
|
0.220650
|
0.150077
|
1.470244
|
0.1526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R-squared
|
0.751813
|
Mean
dependent var
|
12.61567
|
|
|
Adjusted R-squared
|
0.734085
|
S.D.
dependent var
|
0.604632
|
|
|
S.E. of regression
|
0.311790
|
Akaike
info criterion
|
0.598794
|
|
|
Sum squared resid
|
2.721971
|
Schwarz
criterion
|
0.737567
|
|
|
Log likelihood
|
-6.281314
|
Hannan-Quinn
criter.
|
0.644031
|
|
|
F-statistic
|
42.40905
|
Durbin-Watson
stat
|
1.297253
|
|
|
Prob(F-statistic)
|
0.000000
|
|
|
|
|
|
|
|
|
|