- 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.
These problems have remained persistent and challenging to the authorities and managers of the nation’s economy despite the application of various monetary policy measures. This situation has often created frustrations or even doubt on the relevance or other wise of the application of monetary policy measures in the management of the economy. For instance, it was widely reported in the media in 1989 that the former military President of Nigeria, General Ibrahim BadamosiBabangida once said, “The Nigerian economy has defiled all known economic theories”.
However, the growing interest on price stability as a major goal of monetary policy is an acknowledgement of the observed phenomenon that low inflation provides a base for sustained economic growth and development (Debelle and Fischer, 1995; Dornbusch, Fisher and Kearnay, 1999). It is in the light of this that it becomes imperative to critically appraise the relevance of the instruments of monetary management and analyze the relationship between actual inflation and monetary policy target inflation, actual interest rate and monetary policy target interest rate as well as actual exchange rate and monetary policy target exchange rate in Nigeria.
- Objectives of the Study
The objective of this study is to access the effectiveness of monetary policy tools in the management of Nigerian economy. In order to achieve this, the study pursues the following specific objectives.
- To critically appraise the relevance of the instruments of monetary and credit policies and examine the challenges of ensuring appropriate inflation rate, exchange rate and interest rate regimes in Nigeria.
- To find the relationship between actual inflation rate and monetary policy target inflation rate, actual interest rate and monetary policy target interest rate and actual exchange rate and monetary policy target exchange rate.
- Identify those factors prevalent which has led to the ineffectiveness or otherwise of monetary policy instruments in Nigeria and suggest ways of overcoming them.
- Research Questions
This study provides answers to the following questions;
- Are monetary policy instruments truly relevant in the management of the inflation, interest and exchange rate?
- What is the nature of relationship between actual inflation rate and monetary policy target inflation rate, actual interest rate and monetary policy target interest rate and actual exchange rate and monetary policy target exchange rate?
- What arethose factors prevalent which has led to the ineffectiveness of monetary policies in Nigeria
1.5 Research Hypotheses
The following research hypotheses are postulated:-
- The monetary policy instruments are relevant in the management of inflation rate, exchange rate and interest rate in Nigeria.
- There is a linear relationship between actual inflation rate and monetary policy target inflation rate, actual interest rate and monetary policy target interest rate and actual exchange rate and monetary policy target exchange rate.
- There are causative factors that made monetary policy ineffective in checking inflation, interest rate and exchange rates.
1.6 Scope of the Study
The study covers the period: 2000-2007. The choice for this is first, to allow for the lag effects of financial sector deregulation which started in 1986, and not drift into the 2008 financial crisis so as not to allow the stimuli packages bias the results. It is also a period, which was characterized by mounting pressure for granting of full autonomy to the CBN to enable the apex regulatory body well positioned to play its statutory role in the management of the economy in line with the global trend.
- Significance of the Study
The results of this study will be significant to the following;
- Regulatory Authorities
The regulatory authorities and policy makers have often been accused of not doing enough towards solving the nation’s economic problems. Many a time, actions taken are misunderstood, thereby making it very difficult for the enjoyment of the co-operation of all in order to realize the objectives of the policy. This has been so despite the fact that the co-operation and understanding of the citizenry is needed for the policy measure to work. This research work will therefore, assist the Government and policy makers to appraise the relevance of the monetary policy instruments that has been in use and help in finding a lasting solution towards solving the nation’s economic crises both in the short and long term.
- Firms and Households
The business class and household will benefits as they will be made to come to terms with the past, present and future efforts of the government and policy makers toward addressing the crises besetting the nation’s economy.
- Body of Academics
This study will benefit students offering courses in monetary theory and policies. Essentially, the study provides a very good understanding of monetary policy transmission channels mechanisms in Nigeria. This is very important for having a practical understanding of how monetary policies impacts on the economy. The study will also provide valuable research materials for scholars wishing to pursue further studies along this area. This study opens-up further research areas around this topic
1.8. Limitations of the Study
The time requirements, the financial involvement and the difficulty of obtaining the necessary materials for an extensive research involving a national as well as International dimension like the relevance of the monetary policy instruments in Nigeria will be tremendously beyond the purview of this academic exercise. Perhaps the most serious limitation to this research is with regards to data. Apart from the above limitations, it is said that there is a dearth of published works on this national issue in Nigeria. Most of those available are outdated and have not been reviewed. The research, therefore, rely mostly on foreign literature, CBN publications, Newspapers and Magazine.