AN EVALUATION OF MONETARY POLICY INSTRUMENTS IN ACHIEVING MONETARY TARGETS IN NIGERIA

ABSTRACT

The study evaluates the impact of monetary policy instruments in achieving monetary policy targets in Nigeria. The study used correlation co-efficient to evaluate monetary policy transmission mechanisms on monetary policy targets such interest rate, inflation rate and exchange rate. The findings of the study show that monetary policy tools have not been effective in achieving monetary policy targets. The researcher attributes this to frequent changes in monetary policy and the level of uncertainty of the Nigerian economy as shown in the review of monetary policies in Nigeria. Based on the findings, the study, recommends for ensuring stable macroeconomic environment, promotion of healthy and competitive financial system, the need to bolster the technical competence of CBN among others.

TABLE OF CONTENT

CHAPTER ONE: INTRODUCTION

1.1       Background of the Study                                                                              1

1.2       Statement of Problem                                                                       2

1.3       objective of the Study                                                                                   2

1.4       Research Questions                                                                                        3

1.5       Research Hypotheses                                                                                     3

1.6       Scope of the study                                                                                         3

1.7       Significance of the study                                                                               4

1.8       Limitation of the study                                                                                  4

            References                                                                                                      6

CHAPTER TWO: LITERATURE REVIEW 

2.1       Monetary policy and Economic schools                             7

2.2       Empirical literature                                                                  16

2.3       Stylized facts of inflation in Nigeria                                           19

2.3.1    Components and structure of Consumer Price Index             19

2.3.2    Institutional Framework and the Mandate of price stability   21

2.4       Relationship between Inflation and key Macroeconomic Variable 22

2.5       Trends in inflation and policy response in Nigeria   24

2.5.1    Definitions of variable                                                            28

2.6       The Conceptual basis for Monetary Management                     30

2.7       Appropriate Exchange rate                                                         34

2.8       Interest rates                                                                              38

2.9       Achieving the trinity                                                               44

            References                                                                                                      49

CHAPTER THREE: RESEARCH METHODOLOGY  

3.1       Research Design                                                                      53

3.2       Sources of Data                                                                                              53

3.3       Method of Data Analysis and Technique for Analysis   53

            References                                                                                                      54

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1       Introduction                                                                                  55

4.2       Data Presentation                                                                      55

4.3       Data Analysis                                                                                                 62

4.4       Test of Hypothesis                                                                        63

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1       Summary of Findings                                                                         66

5.2       Conclusion                                                                                          66

5.3       Recommendation                                                                               67

            Bibliography                                                                                                   69

LIST OF TABLE

Table 1: Percentage contribution of Items in the CPI Basket of Goods                    21

Table 4.2.1: Margin of Deviation between Actual Inflation Rate and

                        Monetary Policy Target Inflation Rate                           55

Table 4.2.2: Margin of Deviation between Actual Interest Rate and

                        Monetary Policy Target Interest Rate.                                    56

Table 4.2.3: Margin of Deviation between Actual Exchange Rate and

                        Monetary Policy Target Exchange Rate.                            56

Table 4.2.4: Estimation for Regression Equation for Inflation Rate                          57

Table 4.2.5: Estimation for Regression Equation for Interest Rate                            59

Table 4.2.6: Estimation for Regression Equation for Exchange Rate                        61

AN EVALUATION OF MONETARY POLICY INSTRUMENTS IN ACHIEVING MONETARY TARGETS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.    Background of the Study

Because money can affect many economic variables that are important to the wellbeing of any economy, politicians and policy makers throughout the world care about the conduct of monetary policy- that is -the management of inflation rates, exchange rates and interest rates (Cukierman, Webb and Neyapti, 1992). The institution responsible for the conduct of a country’s monetary policy is the Central Bank. Monetary policy involves changes in the money supply or the choice central banks make regarding the money supply (Essien, 2005).

According to Essien (2002), it is how the monetary authorities choose to regulate and control the value, supply and cost of money in the economy in consonance with the expected level of economic activity. In choosing how best to regulate the money supply, the Central Bank makes use of monetary policy instruments to influence certain variables to achieve some intermediate goals, which would eventually lead to the ultimate objectives. The impacts of these policy instruments are translated to the economy through a process called transmission mechanism. De-Brouwer and Ericsson (1995) stresses that, the channel of transmission can be through either quantities or prices. He however, added that the policy could be transmitted through quantities via the monetary or credit channels and through prices via the interest rate, exchange rates or asset prices.

Monetary policy generally describes the actions taken by the central bank to influence monetary conditions in the economy with a view to achieving some defined macroeconomic goals.The mandate of the Central Bank of Nigeria (CBN) is derived from the CBN Act of 1958, as amended in 1991, 1993, 1997, 1998, 1999 and 2007.The Act charges the Bank with the overall control and administration of the monetary and financial sector policies of the Federal Government of Nigeria. The act statutorily mandates CBN to: issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; ensure monetary and price stability; promote a sound financial system in Nigeria; and act as banker and provide economic and financial advice to the Federal Government of Nigeria. The attainment of these goals would result into the country achieving both internal and external balance (Duravell and Ndungu’u, 1999). The essence of this study is to appraise the effectiveness of these monetary policy instruments in the management of Nigerian economy.

Statement of Problem

Nigeria economy like many others of the developing countries has in the last two decades been beset by a number of problems which includes:- rising inflations, persistent weakness of the national currency (the Naira) in the foreign exchange market, slow growth, high interest rate, massive unemployment and huge external debt burden.