The impact of monetary policy on the nigeria economy

Thesis Overview

<p> </p><div><p><strong>1.1 BACKGROUND OF THE STUDY</strong></p><p>Since its establishment in 1959 the central bank of Nigeria (CBN) has continue to play the traditional role expected of a central bank, which is the regulation of the stock of money in such as way as to promote the social welfare (Ajayi, 1999). This role is anchored on the use of monetary policy that is usually targeted towards the achievement of full-employment equilibrium, rapid economic growth, price stability, and external balance. Over the years, the major goals of monetary policy have often been the two later objectives. Thus, inflation target and exchange rate policy have dominated CBN’s monetary policy focus based on assumption that these are essential tools of achieving macroeconomic &nbsp;stability. The economic environment that guided the monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the public sector in the economy and over-dependence on the external sector. In order to maintain price stability and a healthy balance of payment position, monetary management depended on the use of direct monetary instruments such as credit ceilings, selective credit control, administered interest and exchange rate, as well as the prescription of cash reserve requirements and special deposits. The use of market-based instruments was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberate restraint on interest rate.</p><p>The most popular instrument of monetary policy was the issuance of credit rationing guidelines, which primarily set the rates of change for the components and aggregate commercial bank loans and advances to the private sector. The sector allocation of bank credit in CBN guidelines was to stimulate the productive sectors and thereby stem inflationary pressures. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of free reserves and credit-creating capacity of the banks. Minimum cash ratios were stipulated for the banks in the mid 1970’s on the basis of their total deposit liabilities, but since such cash ratios were usually lower than those voluntarily maintained by the banks, they provide less effective as a restraint on their credit operations.</p><p>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, promotion of employment and output growth, and sustainable development (Folawewo and Osinubi, 2006). These objectives are necessary for the attainment of internal and external balance, and the promotion of long run economic growth.</p></div><h3></h3><br> <br><p></p>