This is to examine the impact of
monetary policy on investment in' Nigerian ECPMP and the objectives are
as follows: To ascertain if monetary policy instruments have impact on
investment in Nigeria, if it does, to ascertain the relationship, To
examine if long run relationship exists between monetary policy
instruments and investment in Nigeria, To examine if causality exists
between monetary policy instruments and investment in Nigeria.
Finally, monetary Nigerian Economy, only
an effective monetary policy can guarantee price / stability, which is
necessary condition of sustainable growth and development of Nigerian
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.0 Background to the Study.
1.1 Statement of the Problem
1.2 Objectives of the Study
1.3 Hypothesis of the Study
1.4 Significance of the Study
1.5 Research Methodology
l.6 Scope of the Study
1.7 Plan of the Study
CHAPTER TWO: LITERATURE REVIEW
2.0 . Introduction
2.1 Theoretical Review
2.1.1 Monetary Policy.
21.2 Objectives of Monetary. Policy
2.1.3 Tools of Monetary Policy
2.2 The Effectiveness of Monetary Policy
2.2.2 Investment and Capital
2.2.3 Types of Investment
2.3 Empirical Review
2.3.1 Fisher's Theory of Capital and Investment
2.3.2 The Classical View of Investment
2.3.3 The Y -Theory of Investment
2.3.4 . Limitation of Previous Studies
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Model Specification
3.2 Specification of Model 1
3.2.1 Specification of Model 2
3.3 Evaluation Procedure
3.4 Justification of the Model
3.5 Analytical Techniques
3.6 Data Required and Sources
CHAPTER FOUR: DATA ANALVSIS, PRESENTATION AND
INTERPRETATION OF RESULTS
4.1 Unit Root Test .
4.2 Co-Integration Results
4.3 The Presentation of Model 1
CHAPTER FIVE: SUMMARY, CONCLUSION AND ECOMMENDATIONS
5.1 Summary of Findings
1.0 BACKGROUND TO THE STUDY
Financial instability is the new
challenge for monetary policy. Most studies indicate that the typical
patterns of financial crisis include prolonged unwinding of investment.
These phenomena challenge modern monetary policy.
Monetary policy is the process by which
the government, central bank, or monetary authority of a country
controls (i) the supply of money, (ii) availability of money, and
(ii)cost of money of rate of interest, in order to attain a set of
objectives oriented towards the .growth and stability of the economy.
Monetary theory provides insight into how to craft optimal monetary
Monetary policy is referred to as either
being an expansionary policy or a contractionary policy. Where an
expansionary policy increases the total money supply in the economy, the
contractionary policy decreases the total money supply in the, economy.
,Expansionary policy is traditionally used to combat unemployment in a
recession by lowering the interest rates while contractionary policy
involves raising interest rate in order to' combat inflation. Monetary
policy is, contrasted with fiscal policy, which refers to government
borrowing, spending and. taxation.
Monetary policy rests on the
relationship between the rates of interest in an economy, that is the
price at which money can' be borrowed and the total supply of money.
Monetary policy uses a variety of tools to control one or both of
these, to influence outcomes like economic growth (investment),
exchange rate with other currencies and employment. Where currency is
under a monopoly, of issuance, or where there is a regulated system of
issuing currency through banks which are tied to a central bank, the
system authority has the ability to alter the money
supply and thus influence the interest rate (in order to achieve' Policy
goals). The beginning of monetary policy as such comes from the late 19th,century, where it was used to maintain the gold standard.
A policy is referred to as
contractionary if it reduces the size of the money supply, or-raises the
interest rate, An expansionary policy increases the size of the money:
supply, or decreases' the interest rate. Furthermore, monetary policies
are described, as follows: accommodative, if the interest rate set by
the monetary authority is 'intended to create economic growth: neutral
if it is intended neither to create economic growth nor combat
inflation: or tight, if intended to reduce inflation.
There are several monetary policy tools
available to achieve these ends: increasing interest rate, by flat:
reducing the monetary base and increasing reserve requirements. All have
the effect of contracting the money supply; and if reserved, expand the
money supply. Since the 1970s, the BRETTON WOODS system still ensured that most nations would form the two policies separately,
Within almost all modem nations, special
institutions (such as ,the Bank of England, the European Central Bank
the Federal Reserve in the United States, The reserve Bank, of India,
the Bank of Japan or the Bank of Canada) ,exist which have the task of
executing the monetary policy and often independently of the ,executive.
In general, these institutions are called central banks and often have
oilier responsibilities such as supervising .the full operation of the
The primary tool of monetary policy is
open market operations. This entails managing quantity of money in
circulation through the buying and selling of various credit
instruments, foreign currencies or commodities. All of-these purchases
or sales results in more or less base currency entering or leaving
Usually the short term goal of open
market operation is to achieve a specific short term interest rate
target in other instances, monetary policy might instead entail the
targeting of a specific exchange rate relative to some foreign currency
or else relative to gold. For example, in the case of USA, the Federal
Reserve targets the federal fund rate, the rate which member banks lend
to one another overnight, However the monetary policy of China is to
target the exchange rate between the Chinese Renminbi and a basket of
The other primary means of conducting monetary policy include:
(i) Discount window lending (lender of last resort)
(ii) Fractional deposit lending (changes in the reserve requirement)
(iii) Moral suasion (cajoling certain market players to achieve specified. outcomes)
(iv) "Open mouth operation" (talking monetary policy with the market),
1.1 STATEMENT OF THEPROBLEM
The problems facing the Nigeria economy,
today include increasing level of unemployment; high level/rate of
inflation, over-dependence on the oil sector that is oil exports; slow
pace of growth and development in real output. And other problems
may include inadequate policies, unstable pressures on the balance of
payment (BOP), persistent weakness of the naira value in foreign
exchange 'market (Forex); and high/interest rates due partly to
inflationary expectations, and partly to imperfections in the financial
markets (both money and capital markets). Finally is the uneven income
distribution, which has militated deeply against the decline in output
and living standard of the people. It, nevertheless; is pellucid that,
despite the exercising of monetary policy measures, the situation seems
Over the years the central monetary
authority (The Central Bank of Nigeria) has been on the active path of
trying to combat the above mentioned problems by adopting one monetary
policy after another taking note of the effect(s) which these, may have
on various 'sectors of the economy. The latest of these is the recent
bank recapitalization of N25 billion and regulation of bank lending
through the interest rate of about 17%. These have had their tolls in
the economy by affecting the level of investment considerably and .as we
must have noticed, certain of the aforementioned problems persist. .
This research project, comparatively,· is to look. at the Monetary
Policy Impact on investment in Nigeria as-investment is a key factor in
determining the level of performance of the economy. Hence we ask the
- How far has the various monetary policy Instruments impacted in the investment atmosphere of the Nigerian economy?
- Does these exist any relationship between the level of investment and the monetary policy instruments in Nigeria?
1.2 OBJECTIVES OF THE STUDY
The general objective of this study is
to examine monetary policy in Nigeria in relation to its impact on
investment. To achieve that, this topic will pursue the specific under
(i) To ascertain if monetary
policy instruments have impact on investment in Nigeria, if it does to
ascertain the relationship.
(ii) To examine if long run relationship exists between monetary policy instruments and investment in Nigeria .
(iii) To examine if causality exists between monetary policy instruments and Investment in Nigeria.
1.3 HYPOTHESES OF THE STUDY
The following hypothesis will guide this study:
(i) Ho: Monetary policy instruments do not have any significant impact on investment in Nigeria,
Hi: Monetary policy instruments have significant impact on investment in Nigeria.
(ii) Ho: long run relationship does not exist between monetary policy instruments and Investment in Nigeria
Hi: long run relationship exists between monetary, policy instruments and investment in Nigeria
(iii) Ho: There is no causality between monetary Instruments and investment in Nigeria.
Hi: There is no causality between monetary instruments and investment in Nigeria
1.4 SIGNIFICANCE OF THE STUDY
Investors: Both the foreign and local
investors will benefit from this work since the research exposes the
impact of several monetary policy regimes on investment. This will
enable the investors to know when to and when not to invest.
Policy Makers: This research will also
be beneficial to the policy makers seeing that the work .will reveal the
impact of monetary policy instruments on· investment in. Nigeria. This
will help the policy makers know the efficient monetary policy to make
regarding certain investments: foreign or local.
1.5 RESEARCH METHODOLOGY
The method to be used in approaching
this subject matter shall be descriptive. It will involve the employment
of tabular analysis of data and graph or both. The source of data for
the purpose of this essay shall be through primary and secondary
sources. This will however be through regression analysis. The secondary
data shall include information from journals of commercial banks,
specialized banks and the Central Bank of Nigeria (CBN). Also,
collections of information from the financial statement of some
specialized credit bodies.
1.6 SCOPE OF THE STUDY
This study covers the Nigerian economy
from 1970 to 2096. That is, a period of thirty seven (37) years. The
choice of this period is based on the availability of data and the fact
that it is a time series analysis.
1.7 PLAN OF THE STUDY
The project work is divided into five chapter which are as follows;
Chapter one consists of the
introduction, statements of the problem, aims and objectives of the
study, research questions, research hypotheses, research methodology,
scope of the study, significance of the study. Chapter two consists of
the literature review of the study. Chapter three consists of the
research methodology. Chapter four consists of the data analysis,
presentation and interpretation of the result finding while chapter five
consists of the summary of finding, conclusion and recommendation, then