AN ASSESSMENT ON THE EFFECTIVENESS OF MONETARY POLICY ON ECONOMIC STABILIZATION

CHAPTER ONE

INTRODUCTION

1.0    BACKGROUND STUDY

Economies all over the world experience one form of fluctuations or the other at different times. These fluctuations are usually beyond the ability of the market working through the price to cushion them. Hence, market failure.

A key of all central banks including the Central Bank of Nigeria is to promote and maintain monetary stability and a sound financial system. The assumption is that this will help encourage long term planning, aid infrastructural development, attract foreign investments and engender economic growth. While the central bank is totally responsible for the promulgation of sound monetary policies in order to aid the attainment of the above objectives, the formulation of fiscals' policies, which also affects the achievement of the above objectives, however falls on the wider government, particularly the Ministry of Finance. Given the both monetary and fiscal policies impact on economic growth and development, it is not surprising that they are entwined. This relationship has been explicitly explained thus:

Monetary policies are inextricably linked in macroeconomic management; developments in one sector directly affect developments in the other. Undoubtedly, monetary policy is usually concerned with the use of hanges in money supply and/or interest rates to influence the level of economic activity. It is anchored on the use of all or some of the following policies: Open Market Operations, Liquidity Rations, Rediscount Policy, Minimum Reserve Requirement and Sectoral Credit Guidelines.

On the other hand, fiscal policies involves the use of taxes and changes in government expenditure to influence the level of economic activity (Ekpo, 2003, p.15) affects the disposable income of citizens and corporations, as well as the general business climate. In this regard, the interrelationship between public spending and private sector performance is of paramount importance. On one hand, Government expenditure can provide an impulse for private sector growth, while on the other, it can be harmful if it results in budget deficits and leads to competition for scarce financial resources from the banking sector as the government seeks to finance the deficit. In such circumstances, the crowding out of the private sector by the Government sector can outweigh any short-term benefits of an expansionary fiscal policy.

The key to all these therefore lies in striking a good balance in fiscal management. Having enough expenditure outlays to meet the needs of Government and support growth, but not so much as to deny the private sector the resources it needs to invest and develop.