The study examined an evaluation of monetary policy in Nigeria and its impact on economic growth.
More specifically, the study sought to assess monetary policy and economic growth in Nigeria.
The study focuses on major growth
components such as the Gross Domestic Product (GDP), and price level,
while qualitative research method was adopted.
The variables of interest germane of the
study are real gross domestic product (RGDP), broad money supply (M2),
required reserve ratio (RRR), discount rate (DIT) and inflation rate
The econometric techniques use to
analyze the data are Unit Root test, Johansen Cointegration test,
Ordinary Least Square (OLS) technique and the Granger Causality test.
Result from the study indicated that
there is no pair wise causality between M2 and RGDP, RRR and RGDP, INF
and RGDP, RRR and M2, DIT and M2, DIT and RRR, INF and RRR and INF and
DIT at 5% their probability values exceeds the standard 0.05.
Base on this, the study advised that
there should be a consistent fight from the demand and supply side plus
political approach by means of political and policy stability.,
secondly, An effective tax policy should be adopted, making it
impossible for tax evasions and avoidance to actualize the goal of
income policy., lastly constraints to the effectiveness of past monetary
policies should be eliminated and consistent and more adopted.
1.0 BACKGROUND TO THE STUDY “Monetary
policy is known to be a vital device that a country can set out for the
maintenance of domestic price and exchange rate viability, as a
critical condition for the achievement of a sustainable economic growth
and external viability”(Amasomma, 2011).
According to Dwivedi Monetary policy is
the deliberate use of monetary instruments (direct and indirect) at the
disposal of monetary authorities such as central bank in order to
achieve macroeconomic stability. Monetary policy is essentially the tool
for executing the mandate of monetary and price stability. Monetary
policy is essentially a program of action undertaken by the monetary
authorities generally the central bank, to control and regulate the
supply of money with the public and the flow of credit with a view to
achieving predetermined macroeconomic goals.
Monetary policy refers to the
combination of measures designed to regulate the value, supply and cost
of money in an economy in consonance with the level of economic
activities. It can also be described as the art of controlling the
direction and movement of monetary and credit facilities in pursuance of
stable price and economic growth in the economy (CBN 1992).
Like any other developing country,
Nigerian government adopts three types of public policies to carry out
the objective of income distribution and allocation of resources. These
tools of public policy include: monetary policy, fiscal policy and
income policy tools. In Nigeria, government has always relied on
monetary policy as a way of achieving certain economic objective in the
economy such macroeconomic objectives include; employment, economic
growth and development, balance of payment equilibrium and relatively
stable general price level. The reason for choosing monetary policy is
the fact that monetary policy has very serious implications for both
fiscal and income policy measures.
Since its establishment in 1959, the
Central Bank of Nigeria (CBN) has continued to play the traditional role
expected of a central bank, which is the regulation of the stock of
money in such a way 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 (Fasanya et al, 2013;
Adesoye et al, 2012). Over the years, the major goals of monetary policy
have often been the two later objectives. Thus, inflation targeting and
exchange rate policy have dominated CBN’s monetary policy focus based
on assumption that these are essential tools of achieving macroeconomic
stability (Aliyu and Englama, 2009).
A close observation of these definitions
of monetary policy shows that monetary policy boils down to adjusting
the supply of money in the economy to achieve some combination of
inflation and output stabilization. Most economist agree that in the
long run output usually measured by gross domestic product (GDP) is
fixed, so any changes in the money supply only cause prices to change.
But in the short-run, because prices and wages usually do not adjust
immediately, changes in money supply can affect the actual production of
goods and services (Koshy, 2012).
According to Anyanwu (2003), countries
seeking for sustainable economic growth after a period of macroeconomic
imbalances must first get stabilized. In Nigeria, monetary policy
effectively implemented is an important tool for stable economic growth.
The primary goal of monetary policy in
Nigeria has been the maintenance of domestic price and exchange rate
stability since it is critical for the attainment of sustainable
economic growth and external sector viability (Sanusi, 2002).
Economic growth is essential in an
economy as it reduces poverty as well as improving standard of living.
The growing importance of monetary policy has made its effectiveness in
influencing economic growth a priority to most governments. Despite the
lack of consensus among economists on how monetary policy actually works
and on the magnitude of its effect on the economy, there is a
remarkable strong agreement that it has some measure of effects on the
economy (Nkoro, 2005).
Economic growth has long been considered
an important goal of economic policy with a substantial body of
research dedicated to explaining how this goal can be achieved (Fadare,
1.1 STATEMENT OF PROBLEM
“Monetary policy is known to be a vital
instrument that a country can deploy for the maintenance of domestic
price and exchange rate viability, as a critical condition for the
achievement of a sustainable economic growth and external
viability”(Amasomma et al, 2011). on a yearly basis, the monetary
authority formulate guidelines geared towards the enhancement and
development of policy variable designed to ensure optimal performance of
the banking industry and ultimately to advise the macroeconomic goals
or objectives but in the implementation of such policy variable certain
conflicting issues are to be addressed ranging from the ability to
comply with various monetary policy guidelines as well as satisfying
depositors and shareholders (Chimezie, 2012). Central bank of Nigeria
uses various instruments to achieve its stated objective and these
include: open market operation (OMO), required reserve ratio (RRR), bank
rate, liquidity ratio, selective credit control and moral suasion.
There have been various regimes of monetary policy in Nigeria.
Sometimes, monetary policy is tight and at other times it is loose,
mostly used to stabilize prices. The economy has also witnessed times of
expansion and contraction but evidently, the reported growth has not
been a sustainable one as there is evidence of growing poverty among the
populace. The controversy bothering on whether or not monetary policy
measures actually impact on the Nigerian economy is a problem this study
sets to solve. Therefore, the main thrust of this study is to evaluate
the effectiveness of the CBN’s monetary policy over the years. This
would go a long way in assessing the extent to which the monetary
Policies have impacted on the growth process of Nigeria using the major
objectives of monetary Policy as yardstick.
1.2 OBJECTIVES OF THE
The research objectives are:
- To evaluate the impact of monetary policy on the economic growth of Nigeria.
- To examine the trend of monetary policy over the years in Nigeria.
- To determine if there is a significant long run relationship between
monetary policy variables and Nigeria’s gross domestic product
1.3 RESEARCH QUESTIONS
Based on the research objectives, the research questions are:
- What impact does monetary policy have on the economic growth of Nigeria?
- What is the nature of the trend of monetary policy in Nigeria, over the years?
- Is there a significant long run relationship between monetary policy variables and Nigeria’s gross domestic product?
1.4 STATEMENT OF HYPOTHESIS
H0: Monetary policy has no impact on the economic growth of Nigeria.
H1: Monetary policy has an impact on the economic growth of Nigeria.
H0:There is no significant long run relationship between monetary policy variables and Nigeria’s gross domestic product.
H1: There is a significant long run relationship between monetary policy variables and Nigeria’s gross domestic product.
1.5 JUSTIFICATION OF THE
The study is significant, as it would add to existing
literature on monetary policies in Nigeria and its impact on growth in
the Nigerian economy. It would provide an objective view of the
effectiveness of the monetary policy in Nigeria and provide an
econometric basis upon which to examine the effect of monetary policy on
the Nigerian economy. It will serve as a guide to further research,
academic work and as a self-help study material for those who might wish
for firsthand knowledge about the study. The practical significance of
the study lies in the fact that Nigerian policy makers will find it is a
helpful material in the formulation and implementation of policies in
1.6 SCOPE OF THE STUDY
This study will only focus on major growth components such as
the Gross Domestic Product (GDP), and price level. This study will cover
all the facets that make up the monetary policy, but shall empirically
investigate the effect of the major ones. The empirical investigation of
the impact of the monetary policy on the macroeconomic variables in
Nigeria shall be restricted to the period 1984 to 2014.
This period is chosen since it
corresponds with the period for which uniform data on the relevant
variables are available and meets the minimum requirement for relevant
theoretical tests that would be carried out. More importantly, this
period witnessed various monetary and economic policy regimes.
The study adopts quantitative research method. The method
involves the collection of quantitative data in form of statistical data
The statistical data from CBN on the
impact of monetary policy on the economic growth of Nigeria will provide
secondary data for the study, to enable the historical trend analysis
of changes in naira.
Theoretical literature will also be
collected, providing data for literature review to provide background
and guide to the study. Secondary data can also be derived from these
studies depending on their relevance to this research
This chapter consists of the background
to the study, the statement of the problem addressed by the research,
the research aim, the research objectives, the research questions, the
research deliverables, and the scope of the study, the project outline,
and the justification of the study.
Chapter two- Literature
This chapter covers review of articles on relevant literature to the
study, the theoretical review, conceptual review and empirical review.
This chapter covers the research philosophy adopted, the methods of
data collection, and methods of data analysis, reliability and validity
of the research, ethical and legal concerns, and limitations to the
Chapter four- Data Analysis and
Here, data collected from the CBN statistical bulletin is presented and
analyzed. It also shows the reliability analysis of the study. The
results are discussed, and used to answer each research question.
This chapter provides conclusion and summary on the study. It also
provides recommendations on the impact of monetary policy on economic