This study examined the impact of monetary policy on the growth of Nigeria economy between the period of 1985 and 2015 with the objective of finding out the impact of various monetary policy instruments (money supply, interest rate and monetary rate) in enhancing economic growth of the country within the period considered. To identify the stationarity characteristics of the data employed in the empirical investigation, various advanced econometric techniques like Augmented Dickey Fuller Unit Root Test, Johansen cointegration test and Error Correction Mechanism (ECM) were employed and the following information surfaced: Some of the variables was stationary at level while other variables became stationary after first difference. Hence they were integrated of order zero and one. The cointegration result indicated that there is long run relationship among the variable with 1 cointegrating vectors. The result of the error correction mechanism (ECM) test indicates that only broad money supply exerted significant impact on economic growth in Nigeria while other variables did not. Equally, only money supply and monetary policy rate possessed the expected sign while interest rate contradicted expectation. The study concluded that monetary policy did not impact significantly on economic growth of Nigeria within the period under review and that the inability of monetary policies to effectively maximize its policy objective most times is as a result of the shortcomings of the policy instruments used in Nigeria as such limits its contribution to growth. The study recommended for effective operation of the monetary policy measures in the Nigerian economy, the Central Bank of Nigeria should be granted full autonomy on its monetary policy functions due to insignificant impact of its tools. Partial Autonomy should be replaced with full autonomy for the central banks in the developing Economies at large.
1.1 Background of the Study
Countries all over the world are supposed to achieve certain objectives for them to be said to be doing well. Some of these objectives include price stability, high rate of employment, a desirable and sustainable rate of economic growth and balance of payment equilibrium. Government uses their organs and the private sector to achieve these goals.
Nigeria as a developing economy has since independence in 1960, been striving to achieve these. One of the channels of doing this is through the instrumentality of monetary policy.
Monetary policy is one of the key drivers of economic growth through its impact on economic variables. The growing importance of monetary policy has included its effectiveness on influencing economic growth a priority to most governments. According to Jhingan (2000), monetary policy refers to the credit control measures adopted by the central bank of a country. This policy employs central bank’s control of the supply of money as instrument for achieving desired economic goals.
As asserted by Salvin (1991), monetary policy is the use of open market operations, change in discount rate, change in reserve requirement and other measures available to the monetary authorities to control the rate of growth of money supply. He further noted that the goals of monetary policy are price stability, relative full employment and satisfactory rate of economic growth.
Monetary policy was classified into two main parts; Expansionary monetary policy and contrastionary monetary policy.
Expansionary monetary policy increases the total supply of money in the economy more rapidly than usual. The CBN enacts an expansionary policy when federal Open Market Committee aims to decrease the federal fund rates.
The CBN purchase government securities through private bond dealers and deposit payment into the bank accounts of the individuals that sold the bonds.
The deposit become part of the cash that commercial banks sold at the CBN and therefore increase the amount of money that commercial banks have available to lend.
On the other hand, contrastionary monetary policy decreases the total supply of money in the economy. The CBN enacts a contrastionary monetary policy when the federal open market committee looks to increase the federal funds rate and slow the economy. CBN sells government securities to individuals and institutions which decreases the amount of money left for commercial banks to lend; this increases the cost of borrowing and increases interest rate.
In Nigeria, monetary policy has been in use since the central bank of Nigeria was given charge over the responsibility of formulating and implementing monetary policy by central bank Act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for Open Market Operation and raising debt for government has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market (Ajayi, 1999).
One of the major objectives of monetary policy in Nigeria is stabilization of economic growth. Nigeria government has adopted various monetary policies through central bank of Nigeria over years to achieve economic growth.
1.2 Statement of Problems
Though monetary instruments are vital instruments on regulating the activity of an economy but the unfavorable macroeconomic problems in the context of Nigerian economy have not allowed the economy to enjoy the beauty of these instruments. The policy has been operated with the variety of objectives such as adjusting money supply, price stability, economic growth, full employment and adoption of inflation targeting in 2008.
But despite the increasing emphasis on manipulation of monetary policy in Nigeria, the problem surrounding high unemployment rate, low exchange rate and high inflation rate. All these problems have caused a fast decline in the economic growth of Nigeria.
Secondly, the transmission mechanism of monetary policy is less effective in an unstable and crisis ridden financial instability thereby making it difficult for the achievement and maintenance of strong macroeconomic fundamentals.
More so, Price stability is one of the major macro-economic objectives in Nigeria. Despite the various monetary policy regimes which have been adopted by the central bank of Nigeria over the years, inflation still remain as a major threat to Nigeria economic growth.
1.3 Research Questions
In view of the above research objective formulated, the research questions would be as follows:
- What is the impact of monetary policy rate on economic growth in Nigeria economy?
- What is the impact of interest rate on economic growth in Nigeria economy?
- What is the impact of broad money supply (M2) impacted on economic growth in Nigeria economy?
1.4 Objective of the Study
The main objective of this study is to evaluate the effectiveness of monetary policy on economic growth of Nigerian economy. However, the following specific objectives would also be achieved:
- To examine the impact of monetary policy rate (MPR) on economic growth in Nigeria economy.
- To determine the impact of interest rate on economic growth in Nigeria economy.
- To examine the impact of broad money supply on economic growth in Nigeria economy.
1.5 Statement of Hypotheses
Following the above research questions and objectives, are stated in null form. Thus, we have;
- H0: Monetary policy rate (MPR) has no significant impact on the gross domestic product (GDP) of Nigerian economy.
- H0: Interest rate has not significantly impacted on the gross domestic product (GDP) of Nigeria economy.
- H0: Broad money supply (M2) has no significant impact on the gross domestic product (GDP) of Nigeria economy.
1.6 Scope of the Study:
This research work deals on the “impact of monetary policy and its tools on Nigerian’s economic growth” ranging from 1985-2015. This study is carried out in Nigeria economy.
1.7 Significant of the Study
If this research work is logically concluded and approved by the department of economics, it will be of great importance to the government in achieving the macroeconomic objectives of price stability and as well as sustained economic growth. It will equally be of ultimate importance to bank and financial institutions in carrying out the macroeconomic objectives of the country where they are operating. This research work suggests ways through which the regulatory authorities can manipulate interest rates and other monetary policy tools to achieve the desired objectives.
Students and indeed the general public who are carrying out studies on this subject matter will find this research work very useful.
Finally, the suggestion that this research work will offer will help the central bank of Nigeria (CBN) in carrying out its task aimed at proper management of macro economy of Nigeria.
1.8Limitations of the Study
A study of this nature cannot be done without some problems and as such it was constrained by many factors:
Time: While embarking on this detailed research work, the researcher was having lectures, preparing for examination. So time was not enough for the researcher to perfect the work.
Finance: Financial inadequacy was a major limitation to this work; the researcher was financially dependent as a student. The need for materials, transport fare and logistics needed for this research was not adequately provided.
Data: Paucity and inaccuracy of data delayed this work. It took the researcher a lot of time before obtaining the data used in this research work.
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