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.

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
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

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.

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.  

            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.        

                                        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
             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
            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)
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.       

           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.

            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.
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.

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                         SOURCE: CBN STATISTICAL BULLETIN VOLUME 21, 2010
Dependent Variable: RGDP

Method: Least Squares

Date: 05/19/13   Time: 12:43

Sample: 1980 2010

Included observations: 31

Std. Error


    Mean dependent var
Adjusted R-squared
    S.D. dependent var
S.E. of regression
    Akaike info criterion
Sum squared resid
    Schwarz criterion
Log likelihood
    Hannan-Quinn criter.
    Durbin-Watson stat

Dependent Variable: LOG(RGDP)

Method: Least Squares

Date: 05/19/13   Time: 12:44

Sample: 1980 2010

Included observations: 31

Std. Error


    Mean dependent var
Adjusted R-squared
    S.D. dependent var
S.E. of regression
    Akaike info criterion
Sum squared resid
    Schwarz criterion
Log likelihood
    Hannan-Quinn criter.
    Durbin-Watson stat

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