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                                                CHAPTER ONE



One of the greatest challenges facing nations is how to achieve sustainable economic growth and development and formal articulation of how money affects economic growth dates back to the time of Adams Smith and later championed by the monetary economists (Adefeso and Mobolaji, 2010:13). This is because of the numerous benefits that growth confers. A few of the most important ones are; firstly, economic growth raises the general living standard of the population as measured by per capita national income; secondly, economic growth makes many kinds of income distribution easier to achieve; thirdly, economic growth enhances the time frame of accomplishing the basic necessities of man, for example shelter, food, clothing, etc, by a substantial majority of the population (Lipsey,1982:693).

Monetarists strongly believe that monetary policy exact greater impact on economic activity as unanticipated change in the stock of money affects output and growth i.e the stock of money must increase unexpectedly for central bank to promote growth (Omotor, 2007). Ezema (2009) defines monetary policy as a combination of policy actions taken by the central bank of a country to influence money supply, interest rate, availability and cost of credit in an economy. Monetary policy aims at achieving the broad objectives of commensurate economic growth rate and development of the national economy through specific objectives which include price stability, full employment, favorable balance of payment and others (Okwu,,2011;Nwankwo, 1991). It covers gamut of measures or combination of packages intended to influence or regulate the volume, prices as well as direction of money in the economy. Specifically, it permeates all the debonair efforts by the monetary authorities to control the money supply and credits conditions for the purpose of achieving diverse macroeconomic objectives (Ajie and Nenbee, 2010). Chamberlin and Yueh (2006:55) add that monetary policy – the act of controlling the supply or price of money – may exert a powerful influence over the economy.

Monetary policy can also be defined as the instruments at the disposal of the monetary authorities to influence the availability and cost of credit/money with the ultimate objective of achieving price stability. Depending on the mandate of the monetary authorities, the objectives of monetary policy may well go beyond price stability. More often than not, monetary authorities particularly in developing countries are saddled with a dual mandate – price stability and sustainable growth (Ibeabuchi, 2007). In such a situation, monetary policy is used to achieve both objectives (Aderibigbe, 1997:11 ). The apparent conflict between these views according to Fry (2000:128) is resolved if it can be established that monetary policy can be used to accomplish the goals of high employment and growth only if it maintains stable prices. In such a case, price stability becomes a necessary condition for sustained economic growth and, thus, no conflict between the two objectives, since they imply the same thing.

Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth, price stability and host of other objectives, monetary authorities are saddled with the responsibility of fashioning appropriate monetary policy instruments that can be effectively used to grow their economies (Nenbee, et. al, 2010). In the opinion of Bernanke and Lian (1998), the choice of the monetary instruments used for intervention by policy makers is the major determinant of the degree of impact on monetary aggregates and the ultimate objective of economic growth. In other word, the responsibility lies on the monetary authorities to evaluate and assess the effectiveness or ineffectiveness of the transmission mechanisms of its monetary instruments deployed and determines which one has greater and quicker impact on their ultimate objective amongst others. The transmission mechanism of monetary policy describes the channels or the processes through which monetary policy actions of the central bank impact on the ultimate objectives of inflation and output (Akhtar, 1997;  Ajayi, 2007). Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending and firm balance sheets. Four main channels through which monetary policy influences the economy have been identified in the literature namely, interest rates (sometimes referred to as liquidity channel), exchange rate, other assets prices and credit (Peter, 2005).

In Nigeria, the Central Bank of Nigeria (CBN) is the sole monetary authority. Its core mandate is to promote monetary and price stability and evolve an efficient and reliable financial system through the application of appropriate monetary policy instruments and systemic surveillance. In order to ensure the realization of the goals of price stability and economic growth, the CBN deploys its monetary policy instruments in such a way as to ensure optimality in inflation and growth outcomes (CBN, 2010). Monetary policy complements other economic policies to achieve government’s overall macroeconomic objectives of internal balance and external viability (Adesoye, et. al., 2012).

The conduct of monetary policy in Nigeria has undergone several phases. Three of the phases are easily identified – the era of application of direct controls; the era of application of market instruments (or indirect controls), and the era of intense reform of strategy and institutions. The major objectives of policy has, however, remained unchanged, that is, price stability and sustainable growth of the economy (Omotor, 2007).While the objectives of monetary policy in the early 1970s were designed to deal with four main broad objectives, namely price stability, high rate of unemployment, sustainable economic growth and balance of payments, the approach of monetary policy implementation has evolved over the years from absolute reliance on direct controls in the 1970s and early 1980s to focus on the market based system of monetary control (Uchendu, 1996). Under direct controls, monetary management depended on the use of direct instruments, such as credit ceilings, selective credit controls, administrative fixing of interest rates and exchange rate as well as the prescription of cash reserve requirements. The main objective then was to ensure that funds were made available to the productive sectors of the economy such as agriculture and manufacturing at relatively cheap terms. Under this regime, monetary policy impulses through changes in interest, exchange rates and credit ceilings were expected to positively affect changes in output and prices through the credit channel. Achieving the objective of monetary policy under this approach was, however, hampered by excessive fiscal dominance and poor compliance with statutory directives by deposit money banks as operators continued to hide credit transactions in a way that prevented funds from flowing into the preferred sectors of the economy (Idowu, 2009).

As the financial markets deepened over time as a consequence of the economy wide macroeconomic reforms that commenced mid-1980s, the CBN started the process of shifting from the use of direct instruments to market-based instruments.(Sanusi, 2002).  The most significant move in the new direction came in June 1993 when the Bank introduced OMO. The market-based tools include in addition to OMO, reserve requirements which specifies the proportion of a bank’s total deposit liabilities that should be kept with the central bank; and discount window operations under which the central bank performs the role of lender of last resort to the deposit money banks (Nnanna, 2001). Currently, OMO is the major instrument of monetary policy at the CBN. Other supporting instruments are discount window operations, moral suasion, foreign exchange sales/swaps and the standing facility introduced in December 2006 (CBN, 2006).

As a result of the increasing dynamism of the modern national economy resulting from financial liberalization and greater integration and interdependence of the monetary economies, there is need for continual research and assessment of the relevance and effectiveness of monetary instruments used in monetary management. This will enable policy makers ensure that there is no deviation from monetary targets and that the instrument accomplishes the ultimate goal which is the growth of the nation’s economy. It is as results of this need, amongst others that this study will examine the impact of monetary policy instruments on the economic growth of Nigeria.


Despite the various monetary measures or instruments adopted by the CBN/monetary authority to enhance rapid and sustainable economic growth and given the prominence of monetary policy in macroeconomic management in Nigeria over the years, growth has not accelerated. Instead of growing, the country has witnessed relatively low and unstable economic growth, poor income redistribution and increased poverty level as represented by its per capital income (Udah, 2009). In marked contrast to most developing countries, the country’s GDP is not significantly higher in the year 2011 than it was 30 years before. As many economic indicators shows, Nigeria’s economy has experienced different growth stages. The GDP growth rate recorded negative growth in the early 1980s (-2.7 in 1982, 7.1 in 1983 and -1.1 in 1984). The growth rate increased steadily between 1985 and 1990 but fell sharply in 1986 and 1987 to 2.5% and -0.2%. Except in 1991 when a negative growth rate of -0.8% was recorded, 1990s witnessed an unstable growth. However, the growth rate has been relatively high since 2001. An examination of the long-term pattern reveals the following secular swings: 1965-1968 Rapid Decline (civil war years), 1969-1971 Revival, 1972-1980 Boom, 1981-1984 Crash, 1985-1991 Renewed Growth, 1992-2011 Wobbling.  (CBN Annual Report and Statement of Account: Various issues)

The implication of this worrisome trend of the country’s GDP growth pattern is that CBN’s monetary policy instruments have not been very effective in inducing growth, redistribute income and reduce poverty. The perceived ineffectiveness of monetary policy impact can be submitted as ineffectiveness or failure of the instruments deployed – all things being equal (Don, 1987). In recent past, policy makers have been grappling with the choice of which monetary policy instrument to adopt and on which is more effective than the other in achieving growth objective. For instance, there has been debate on whether an open market operation is more effective than bank rate policy or variable reserve ratios as an instrument of credits control. (Jhigan, 2003:621).There has been further argument on whether it is the bank credit, exchange rate or interest rate channel as a monetary policy transmission channel that has more impact on the economy (Amassom, et. al., 2011). Though at this stage we will not join issues with any of the sides but will take a position at the conclusion of the research work.

Apart from the failure of the monetary policies in engendering sustainable economic growth, it has equally not been effective in maintaining price stability and a viable exchange regime. This is particularly worrisome given the fact that maintenance of domestic price stability is a critical condition to the achievement of sustainable economic growth and external viability (Adebiyi,  2006).  Emeka (2009:4) opines that the pursuit of economic growth invariably implies the indirect pursuit of other objectives such as price stability since economic growth can only take place under condition of price stability and allocative efficiency of the financial markets.

We also recognises that monetary policy implementation especially through the market intervention in Nigeria is confronted with many challenges which has consequently undermined the impact of its policy instruments in achieving set objectives(Adesoye,,2011). Several of the instruments of monetary policy may prove inappropriate. The financial structure may prove rudimentary to permit full use of some instruments. Other instruments/techniques may be unsuited to the problems facing the Nigeria economy. Thus, the limitations of monetary policy are problems of workability of the instruments and applicability of conventional monetary policy to the economic problems of Nigeria (Wada, 1995:11).

Other obstacles to the use of monetary policy instruments to engendering rapid economic growth in Nigeria include the inefficiency of the country’s financial and payment system. This is worrisome given the fact that payment system is a vital link between the financial system and the real sector of the economy.  The prominence of cash transaction purposes increases the volume of currency in circulation or high powered money, which renders monetary control difficult, if not impossible Adefeso and Mobolaji (2010). There is a general consensus in the literature that an inefficient payment system distort the transmission mechanism of monetary policies, even if the design and objectives are laudable (Nnanna, 1999:57). As Kaufman (1973:105) also puts it, the efficiency of monetary policy depends on the strength and speed with which the initial impact of the policy actions is transmitted throughout the economy to the ultimate policy objective. An efficient financial market is very important for the effective performance of monetary policy because it has positive implications for the instruments of monetary policy. It influences the rate of returns on financial assets, volume of transactions, among others.

Further challenges inhibiting the impact of monetary policy on the growth of the economy includes the oligopolistic structure of Nigeria banking system where very few banks control the preponderance of the liquidity in the banking system thereby dictating the interest rate in the market irrespective of the CBNs’ manipulation of the nominal anchor discount rate – the MPR, political instability, the fiscal expansion and concomitant large fiscal deficits, the dualistic financial and product market coupled with a large informal sector that accounts for about 30 percent of the country’s GDP (Ezema, 2009).


The main objective of this study is to empirically investigate the impact of monetary policy instruments on Nigeria’s economic growth in the period under review. The specific objectives are as follow:

(i)   To examine how the use of Treasury bill rate as (a proxy to Open Market Operation) has

impacted on the growth of Nigeria’s Real Gross Domestic Topic (RGDP).

(ii) To determine how the use of Broad Money Supply (M2) as a monetary tool has fared in

stimulating the growth of Nigeria’s Real Gross Domestic Topic (RGDP).

(iii) To assess the impact of Liquidity Ratio (Lr) on the growth of Nigeria’s Real Gross Domestic

Topic (RGDP).

(iv)  To evaluate the impact of the use of Monetary Policy Rate (MPR) as a monetary instrument

on the growth of Nigerian’s Real Gross Domestic Topic (RGDP).


This research shall be guided by the following research questions:

(i)   To what extent has Treasury bill rate as a proxy to Open Market Operations (OMO)

impacted positively and significantly on Nigerian’s Real Gross Domestic Topic (RGDP)?

(ii)  How effective has Broad Money Supply (M2) impacted positively and significantly on

Nigerian’s Real Gross Domestic Topic (RGDP)?

(iii) To what degree has Liquidity Ratio (Lr) impacted positively and significantly on

Nigerian’s Real Gross Domestic Topic (RGDP)?

(iv) To what extent has Monetary Policy Rate (MPR) positively and significantly impacted on

Nigerian’s Real Gross Domestic Topic (RGDP)?


The hypotheses of this study are as follows:

(i)   Treasury bill rate as (a proxy to Open Market Operation (OMO)) a monetary policy instrument does not have a positive and significant impact on Nigerian’s Real Gross      Domestic Topic (RGDP).

(ii)  Broad Money Supply (M2) as a monetary policy instrument does not have a significant   and positive impact on Nigerian’s Real Gross Domestic Topic (RGDP).

(iii) Liquidity Ratio (Lr) as a monetary policy instrument does not have a significant and  positive impact on Nigerian’s Real Gross Domestic Topic (RGDP).

(iv) Monetary Policy Rate (MPR) as a monetary policy instrument does not have a significant   and positive impact on Nigerian’s Real Gross Domestic Topic (RGDP).


1.6         SCOPE OF THE STUDY

The scope of monetary policy comprises of instruments, transmission mechanism, lags, conflicts of objectives etc. However, this study is specifically an empirical investigation on the impact of monetary policy instruments on the economic growth of Nigeria. The research shall be restricted to the period between 1982 and 2011.The reason for the adoption of 1982 as a base year is to capture some years in the era of direct approach prior to the introduction of market friendly techniques in 1986.


The significance of this study can be viewed from the following standpoints –

(a) The Academia

In the academic arena, this study will prove to be significant in the following ways:

(i)  It will contribute to the enrichment of the literature on the nexus between monetary policy instruments and economic growth and serve as a body of reserve knowledge to be referred   to by researchers as well as students in tertiary institutions.

(ii) It would provide to students and researcher

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