ABSTRACT
This study investigates the effectiveness of monetary policy in stimulating economy growth in Nigeria using AK production Function and Vector Autoregressive (VAR) model. The empirical evidence depicts that economic growth in Nigeria is influenced by money supply, electric power consumption, gross fixed capital formation and trade openness. This shows that monetary policy is effective in maintaining economic growth on the long run. The impulse response function revealed that economic growth (GDP) respond to itself and does not respond to other variables like Consumer Price Index (CPI), Broad Money Supply (M2), Interest Rate (IR), Exchange Rate (ER) in some period, while in some period economic growth (GDP) respond to itself and other variable. The Granger causality test showed that there exist unidirectional, bilateral and independence causality. Thus Nigerian government through its monetary authorities should fine-tune the economy by incorporating other policies that will influence economic growth not only in the long run but also, in the short run period. This will go a long way in contributing to higher sustainable economic growth.
TABLE OF CONTENTS
Title Page
Abstract
Table of Content
CHAPTER ONE: INTRODUCTION
1.1 Background Information
1.2 Statement of Problem
1.3 Objectives of the Study
1.4 Hypothesis
1.5 Significance of the Study
1.6 Scope of the Study
1.7 Limitations of the study
1.8 Organisation of the study
CHAPTER TWO: REVIEW OF LITERATURE
2.1 Conceptual Framework
2.2 Theoretical Literature
2.2.1 Traditional Keynesian IS/LM Model
2.2.2 The Mundell-Fleming Model
2.2.3 Tobin q’s Theory
2.2.4 Monetary Transmission
2.3 Constraint of Monetary Policy
2.4 Empirical Literature
2.5 Limitation of Previous Study
CHAPTER THREE: METHODOLOGY
3.1 Analytical Framework
3.2 Theoretical Framework
3.3 Model specification
3.4 Data and their Features
CHAPTER FOUR: DATA ANALYSIS AND EMPIRICAL RESULTS
4.1 Presentation of Pre-estimation test
4.1.1 Cointegration Analyses
4.2 The Response of Monetary Policy to Shocks
In Monetary Policy Instruments
4.3 Granger Causality Test
4.4 Evaluation of results
4.4.1 Economic criteria
4.4.2 Statistical criteria
4.4.3 Economic procedure (tests)
4.5 Evaluation of working hypothesis
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of The Findings
5.2 Conclusion and Lessons for Policy Issue
5.3 Policy Recommendation
REFERENCES
APPENDIX
INTRODUCTIONCHAPTER ONE
1.1 BACKGROUND INFORMATION
An issue which has occupied the minds of government for decades is the effectiveness of monetary policy in influencing economic variables. Despite the lack of consensus among economists on how it actually works and on the magnitude of its effect on the economy, there is a remarkable strong agreement that monetary policy has some measure of effects on the economy (Udegbunam, 2003). Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the level of economic activities. It can be described as the art of controlling the direction and movement of monetary and credit facilities in pursuance of stable price and economic growth in an economy (CBN, 1992).
Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payment. However, emphases on techniques/ instruments to achieve those objectives have changed over the years. There have been two major phases in the pursuit of monetary policy in Nigeria since the inception of the Central Bank of Nigeria, namely before and after 1986 structural adjustment programme (SAP). The first phase (1959-1986) placed emphasis on direct monetary controls, while the second phase (1986-date) relies on market mechanisms or market-based controls.
The era of direct controls was a remarkable period in monetary policy management in Nigeria, because it coincided with several structural changes in the economy; including the shift in the economic base from agriculture to petroleum, the execution of the civil war, the oil boom and crash of the 1970s and early 1980s respectively and the introduction of the structural adjustment programme (Chukwu, 2009; Garba 1996). The economic environment that guided 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 payments position, monetary management depended on the use of direct monetary instruments such as credit ceilings, selective credit controls, administered interests and exchange rates, as well as the prescription of cash reserve requirement and special deposits. During this period CBN’s monetary policies focused on fixing and controlling interest rates and exchange rates, selective sectoral credit allocation, manipulation of the discount rate and involvement in moral suasion. Reviewing this period, Omotor (2007) observes that monetary policy was ineffective particularly because the CBN lacked instrument autonomy and goal determination, being heavily influenced by the political considerations conveyed through the ministry of finance. The CBN (2010) also posited that 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. 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 structural adjustment programme (SAP) adopted in July, 1986 ushered in a new era of monetary policy implementation with market-friendly techniques in Nigeria, It was designed to achieve fiscal balance and balance of payments viability by altering and restructuring the production and consumption patterns of the economy, eliminating price distortions reducing the heavy dependence on crude oil exports and consumer goods imports, enhancing the non-oil export base and achieving sustainable growth. The capacity of the CBN to carry out monetary policy using market friendly techniques was later reinforced by the amendments made to the CBN act in 1991 which specifically granted the CBN full instrument and goal autonomy. In line with the general philosophy of economic management under SAP, monetary policy was aimed at inducing the emergency of a market-oriented financial system for effective mobilization of financial savings and efficient resource allocation. The main instrument of the market based framework is- the open market operations. These operations are conducted wholly on Nigerian Treasury bills (TBs) and repurchase agreement (REPOs) and are being complimented with the use of reserve requirements, the cash reserve ratio (CRR) and the liquidity ratio (RL). These set of instruments are used to influence the quantity based nominal anchor (monetary aggregates) used for monetary programming. On the other hand, the minimum rediscount rate (MRR) is being used as the price-based nominal anchor to influence the direction of the cost of funds....
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