ABSTRACT
Results of monetary policy outcomes suggest that
Nigeria does not enjoy ideal conditions for adopting a monetary policy regime
aimed primarily at stabilizing prices under a freely floating exchange rate.
The reasons often advocated is that Nigeria faces a very volatile macroeconomic
environment and a more acute inflation-output trade-off than other emerging
market economies which have embraced price stabilization programs and thereby
abandoning their exchange rate anchors. Moreover, Nigeria has an intense
exchange of goods and services with the rest of the world which is stronger
than other emerging market economies, thanks to its mainly
oil-exporting-oriented economy. This can make
Nigeria particularly exposed to price and quantity-type external shocks, which
renders price stabilization all the more complicated. Open Market Operation is
one of the monetary policy tools of the Central Bank of Nigeria which entails
the sale or purchase of eligible bills or securities in the open market by the
Central Bank of Nigeria for the purpose of influencing deposit money, banks’
reserve balances, and the level of base money which is effectively aimed at
achieving the price objectives of the Central Bank of Nigeria. Thus,
this study sought to: examine the impact of Open market operation on the maintenance of
Exchange rate price stability in Nigeria and determine the impact of Open
market operation on the maintenance of consumer price stability in Nigeria. The research design
adopted for this study is the ex post
facto research design. This enabled the researcher make use of secondary
data. Annualized data from 1993 to 2007 of proxies from the Central Bank of
Nigeria statistical bulletin were used. The Linear Regression Model (LRM)
estimation technique using SPSS statistical software was used to evaluate the
stated objectives where rate values of Open Market Operation Rate (OMOR) as
proxy for Open Market Operation (OMO) which is the independent variable while
Nominal Effective Naira Exchange Rate Indices (EXR), Inflation Rate (INFR) and
Gross Domestic Product Growth Rate (GDPGR) as a control variables. The result
revealed that open market operation has a negative non-significant
impact on exchange rate in Nigeria (t = -0.025, coefficient of OMOR = -0.003)
and open market operation has positive non-significant impact on inflation rate
in Nigeria (t = 1.604, coefficient of OMOR = 0.047). As revealed from the findings in this research the use of open market
operation as a monetary policy tool have actually influence consumer price
stability in Nigeria hence the study recommends among others that an increased
use of open market operations as a tool for achieving price stability in
Nigeria and a conscious effort monetary
authorities in bring the informal sector into the main stream of the Nigeria
economy. This will help to expand as well as capture the huge funds in the
informal sector which is presently not captured.
TABLE OF CONTENTS
Title
Page i
Approval Page ii
Certification
Page iii
Dedication iv
Acknowledgements v
Abstract vii
List
of Tables x
List
of Figures xi
List
of Appendixes xii
CHAPTER ONE INTRODUCTION
1.1 Background of the Study . . . . 1
1.2 Statement
of Problems. . . . . . . 3
1.3 Objectives
of the Study. . . . . . . 6
1.4 Research
Questions. . . . . . . . 6
1.5 Research
Hypotheses. . . . . . . . 6
1.6 Scope
of the Study. . . . . . . . 6
1.7 Significance
of the Study. . . . . . . 7
1.8 Definition
of Terms. . . . . . . . 8
References. . . . . . . . . 9
CHAPTER TWO REVIEW OF RELATED LITERATURE
2.1 Monetary Policy Framework in Nigerian. . . . 12
2.2 Measuring the Effects of Monetary Policy Innovations in Nigeria. 13
2.3 Nigeria’s Monetary Policy and the Rationale for Adoption. .. 16
2.3.1 The Exchange Rate Targeting Regime (1959-1973). . . 16
2.3.2 Monetary Targeting Regime (1974 to Date). . .. 16
2.3.3
Direct Control (1974-1992). . . . . . . 17
2.3.4 Instruments of Monetary Policy under Indirect Monetary Control Regime 19
2.4 Constraints on Monetary Policy Management in Nigeria. . 21
2.4.1 Fiscal
Dominance. . . . . . . . 21
2.4.2 Liquidity
Overhang. . . . . . . . 21
2.4.3 Oligopolistic Banking System. . . . . 22
2.4.4 Data. . . . . . . . . . 22
2.4.5 Dualistic Financial and Products Market. . . . 22
2.4.6 Inefficient Payments System. . . . . . 22
2.5 Way Ahead for Monetary Policy in Nigeria. . . . 23
2.6 Maintaining Price Stability in Nigeria. . . . 23
2.7 Monetary Policy and Exchange-Rate Targeting. . . 29
2.8 Brief History of Inflation in Nigeria: 1980–2007. . .. 38
2.9 Monetary Policy and Inflation Targeting. . . . . 40
2.10 The Effectiveness of Anticipated Monetary Policy. . . . 48
2.11 Monetary Policy in the Information Economy. . . . 52
2.12 Monetary Policy Evaluation with Noisy Information. . . 53
2.13 Historical Monetary Policy Analysis and the Taylor Rule. . 56
References. . . . . . . . . 58
CHAPTER THREE RESEARCH METHODOLOGY
3.1 Research Design. . . . . . . . 66
3.2 Sources of Data. . . . . . . . 66
3.3 Explanatory Variables . . . . . . . 66
3.3.1 Independent Variables . . . . . . 66
3.3.2 Dependent Variable. . . . . . . . 67
3.3.3 Control Variable. . . . . . . . 67
3.4 Model Specification. . . . . . . . 67
3.5 Model Justification. . . . . . . . 68
3.6 Techniques of Analysis. . . . . . . 69
References. . . . . . . . . 70
CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA
4.1
Presentation of Data. . . . . . . . 71
4.2 Test of Hypotheses. . . . . . . . 73
4.2.1 Test of Hypothesis One. . . . . . . 73
4.2.2 Test of Hypothesis Two. . . . . . . 74
CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Findings and Policy Implications. . . 76
5.2 Conclusion. . . . . . . . . 77
5.3 Recommendation. . . . . . . . 77
5.4 Recommended Areas for Further Studies. . . . . 79
References. . . . . . . . . 81
Appendixes. . . . . . . . . 82
Bibliography. . . . . . . . . 85
LIST OF TABLES
Table 4.1 Presentation of Model Proxies from 1993-2007. . 71
Table 4.2 Regression and Correlation Results for hypothesis One 73
Table 4.3 Regression and Correlation Results for hypothesis Two 74
LIST OF FIGURES
Figure 4.1 Graphical Presentations of Table 4.1. . . . 72
LIST OF APPENDIXES
Appendix One Presentation of Model Proxies from 1993-2007. . 82
Appendix Two Hypothesis One. . . . . . 83
Appendix Three Hypothesis Two. . . . . 84
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In general terms, monetary policy refers to a
combination of measures designed to regulate the value, supply and cost of
money in an economy, in consonance with the expected level of economic activity.
For most economies, the objectives of monetary policy include price stability,
maintenance of balance of payments equilibrium, promotion of employment and
output growth, and sustainable development. These objectives are necessary for
the attainment of internal and external balance, and the promotion of long-run
economic growth (Nnanna, 2001).
The importance of price stability is derived from
the harmful effects of price volatility, which undermines the ability of policy
makers to achieve other laudable macroeconomic objectives. There is indeed a
general consensus that domestic price fluctuation undermines the role of money
as a store of value, and frustrates investments and growth. Empirical studies
(Ajayi and Ojo, 1981) on inflation, growth and productivity have confirmed the
long-term inverse relationship between inflation and growth. When decomposed
into its components, that is, growth due to capital accumulation, productivity
growth, and the growth rate of the labour force, the negative association
between inflation and growth has been traced to the strong negative
relationships between it and capital accumulation as well as productivity
growth, respectively. The import of these empirical findings is that stable
prices are essential for growth.
The success of monetary policy depends on the
operating economic environment, the institutional framework adopted, and the
choice and mix of the instruments used. In Nigeria, the design and
implementation of monetary policy is the responsibility of the Central Bank of
Nigeria (CBN). The mandates of the CBN as specified in the CBN Act of 1958
include; issuing of legal tender currency, maintaining external reserves to
safeguard the international value of the currency, promoting monetary stability
and a sound financial system and acting as banker and financial adviser to the
Federal Government.
However, the current monetary policy framework
focuses on the maintenance of price stability while the promotion of growth and
employment are the secondary goals of monetary policy (see, Nnanna, 2001). In Nigeria, the overriding objective of
monetary policy is price and exchange rate stability (see, CBN, 2001). The
monetary authority’s strategy for inflation management is based on the view
that inflation is essentially a monetary phenomenon. Because targeting money
supply growth is considered as an appropriate method of targeting inflation in
the Nigerian economy, the Central Bank of Nigeria (CBN) chose a monetary
targeting policy framework to achieve its objective of price stability. With
the broad measure of money (M2) as the intermediate target, and the monetary
base as the operating target, the CBN utilized a mix of indirect
(market-determined) instruments to achieve it monetary objectives. These
instruments included reserve requirements, open market operations on Nigerian
Treasury Bills (NTBs), liquid asset ratios and the discount window (see IMF
Country Report No. 03/60, 2003).
Onafowora
(2007 say the CBN’s focus on the price stability objective was a major departure
from past objectives in which the emphasis was on the promotion of rapid and
sustainable economic growth and employment. Prior to 1986, the CBN relied on
the use of direct (non-market) monetary instruments such as credit ceilings on
the deposit money of banks, administered interest and exchange rates, as well
as the prescription of cash reserves requirements in order to achieve its
objective of sustainable growth and employment. During this period, the most
popular instruments of monetary policy involved the setting of targets for
aggregate credit to the domestic economy and the prescription of low interest
rates. With these instruments, the CBN hoped to direct the flow of loanable
funds with a view to promoting rapid economic development through the provision
of finance to the preferred sectors of the economy such as the agricultural
sector, manufacturing, and residential housing (see, Onafowora, 2007).
During the 1970s, the
Nigerian economy experienced major structural changes that made it increasingly
difficult to achieve the aims of monetary policy. The dominance of oil in the
country’s export basket began in the 1970s. Furthermore, the rapid monetization
of the increased crude oil receipts resulted in large injections of liquidity
into the economy, induced rapid monetary growth. Between 1970 and 1973,
government spending averaged about 13 percent of gross domestic product
