EFFECTIVENESS OF MONETARY POLICY IN STIMULATING ECONOMIC GROWTH IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Monetary policy, as an economic management technique, is intended to promote long-term economic growth and development. As articulated by Onyewu (2012) on how money affects economic aggregates, this has been the pursuit of nations. This viewpoint dates back to Adam Smith’s time and was later championed by monetary economists. Since the expositions of the role of monetary policy in influencing macroeconomic objectives such as economic growth and development, which include employment generation, price stability, GDP growth, balance of payments equilibrium, and a slew of others, monetary authorities have been saddled with the primary responsibility of using monetary policy to formulate and implement policies that gear toward driving the economy on an even level.
One of these is monetary policy. the macroeconomic instruments with which nations use to manage their economies. Monetary policy is regarded as an important aspect of macroeconomics because it deals with the use of monetary instruments to regulate the value, supply, and cost of money in an economy in accordance with the expected level of economic activity (Ubi, Lionel and Eyo, 2012). It encompasses a wide range of measures or packages designed to influence or regulate the volume, prices, and direction of money in the economy per unit of time. It pervades all debonair efforts by monetary authorities to control the money supply and credit conditions in order to achieve various macroeconomic objectives. The responsibility for monetary policy formulation in Nigeria rests with
the Nigerian Central Bank (CBN) and the Federal Ministry of Finance (FMF).
In recent years, Nigeria’s monetary environment has been extremely volatile, leaving the economy vulnerable to shocks from volatile commodity prices. If the economy slows and employment falls, policymakers will be tempted to ease monetary policy in order to boost aggregate demand. When aggregate demand growth exceeds growth in the economy’s potential to produce, slack is absorbed and employment returns to a more sustainable path. In contrast, if the economy is overheating and inflationary pressures are rising, the Central Bank will be inclined to counteract these pressures by tightening monetary policy to promote aggregate growth.
Demand should be kept below the economy’s capacity to produce for as long as necessary to defuse inflationary pressures and put the economy on a path to sustainable growth (Anowor and Okorie, 2016).
While these policy choices appear straightforward, monetary policymakers routinely face significant uncertainties because the actual position of the economy and growth in aggregate demand at any point in time is only partially known because key information on variables is only available with lags, requiring policymakers to rely on estimates of these economic variables when assessing the appropriate policy and thus acting on the basis of estimates. Furthermore, monetary policy is not the only factor influencing output, employment, and prices. Many
Other factors influence aggregate demand and supply, and thus the economic position of economic units. Some of these factors can be predicted and factored into spending and other economic decisions, whereas others, such as shifts in consumer and business confidence, creditor posture, natural disasters, disruptions in the oil market that reduce supply, agricultural losses, and slowdowns in productivity growth, can be completely unpredictable and have unanticipated effects on the economy.
Monetary policy objectives in Nigeria, as in other developing countries, include full employment, domestic price stability, adequate economic growth, and external sector stability. Monetary policy’s additional objectives include smoothing the business cycle, preventing financial crises, and stabilizing long-term interest rates and the real exchange rate (Mishra and others). 2008; Pradhan). In pursuing these goals, the CBN recognizes the existence of conflicts among them, necessitating some sort of trade-off at times (Uchendu, 2010). The Bank manipulates the operational target (monetary policy rate, MPR), over which it has significant direct control, in order to influence the intermediate target (broad money supply, M2), which in turn influences the ultimate goal of price stability and sustainable economic growth. As a result, the purpose of this research is to investigate the effectiveness of monetary policy in stimulating economic growth in Nigeria.
1.2 Statement of the Problem
Price stability is one of the primary goals of Nigerian monetary policy. Nonetheless, despite the various monetary regimes adopted by the Central Bank of Nigeria over the years, inflation and unemployment continue to be major threats to Nigeria’s economic growth. In this vein, Greenspan (2003) stated succinctly that “uncertainty is not just an important feature of the monetary policy landscape; it is the defining feature of that landscape.” Within the Nigerian monetary environment, data “robustness,” data transmission mechanism, and fiscal environment are notably identified as her greatest challenge and uncertainty. This has become especially interesting because the Nigerian external sector (balance of payment) influences monetary policies as much as the government budget (net credit to government) does.
the real growth of the economy and prices.
Furthermore, Okorie (2009) observed that monetary data as a component of monetary policy proposals are frequently subject to frequent revision, along with non-availability and quality concerns of non-monetary data such as real sector statistics, which act as a retardation to monetary policies as well as having broad implications for Nigerian economic growth.
Fiscal surprises have been observed to significantly undermine monetary policy; for example, in the event of a fiscal tax surface, monetary policy is expected to immediately become reasonable investment in order to maintain both internal and external balance. As a result of the foregoing, the study’s challenge is to figure out how to best manage the uncertainties so that the basic and primary research can continue.
Monetary policy’s function in achieving efficient price stability and long-term economic growth.
The majority of the available studies on monetary policy in Nigeria by Celina (2014), Onyeiwu (2012), Usman and Adejare (2014), Adigwe, Echekoba, Justus, and Onyeagba (2015) were not in depth because they were theoretical studies whose findings were subjectively influenced by leading arguments in literature. It is noted that previous studies did not pay sufficient attention to the relationship between monetary policy and economic growth in Nigeria, as well as highlighting effective strategies for stimulating growth in Nigeria. As a result of identifying this knowledge gap, this study was designed to critically examine the effectiveness of monetary policy in stimulating economic growth in Nigeria.
1.3 Objectives of the Study
The primary goal of this research project is to evaluate the effectiveness of monetary policy in stimulating economic growth in Nigeria. Other specific goals include:
1. To investigate the impact of monetary policy on price stability in Nigeria.
2. To investigate the impact of money supply on Nigeria’s gross domestic product (GDP).
3. To investigate the impact of interest rates on Nigeria’s economic growth.
1.4 Research Questions
The following research questions will be addressed by the study:
1. What effect does monetary policy have on Nigerian price stability?
2. To what extent does Nigeria’s money supply affect the country’s gross domestic product (GDP)?
3. What effect do interest rates have on Nigeria’s economic growth?
1.5 Research Hypotheses
The First Hypothesis
H0: Monetary policy in Nigeria has no discernible impact on price stability.
H1: Monetary policy has a significant impact on Nigerian price stability.
Hypothesis No. 2
H0: The money supply has no significant impact on Nigeria’s economic growth.
H1: Money supply has a significant impact on Nigeria’s economic growth.
Three Hypothesis
H0: Interest rates have no significant impact on Nigeria’s gross domestic product (GDP).
H1: Interest rates have a significant impact on Nigeria’s gross domestic product (GDP).