THE DYNAMICS OF MONETARY POLICY, AND OUTPUT GROWTH IN NIGERIA. A DISAGGREGATE APPROACH

ABSTRACT
This study empirically examines the Impact of Monetary Policy on Output growth in Nigerian Economy. In line with the objectives of this study, secondary data were obtained from Central Bank of Nigeria Statistical Bulletin covering the period of 1995 to 2014. In concluding the analysis, Multiple Regressions were employed to analyze data on such variables as Open Market Operation, Cash reserve, Exchange Rate and Monetary Policy Rate for Nigeria over the period 1995 to 2014 were all found to have significant effects on Output growth with Adjusted R2 of 0.694 (69.4%). Following the outcome of this study, it is therefore concluded that Cash Reserve Rates and Exchange Rate have significant positive effect on the Nigerian Manufacturing Sector Gross Domestic Product, but Open Market Operation and Monetary Policy Rate have negative effect on the Nigerian Manufacturing Sector’s GDP. All the variables are statistically significant. In order to improve economic growth, it is recommended that government should develop the Manufacturing Sectors of the economy through its capital expenditure. With this, capital expenditure on productive activities and social overhead capital will contribute positively to output growth which will invariably enhance economic growth.

CHAPTER ONE
INTRODUCTION
1.1 Background To The Study
Financial instability is the new challenge for monetary policy. Most studies indicate that the typical patterns of financial crisis include prolonged unwinding of output growth. These phenomena challenge modern monetary policy.

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (ii)cost of money of rate of interest, in order to attain a set of objectives oriented towards the .growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy. '

Monetary policy is referred to as either being an expansionary policy or a contractionary policy. Where an expansionary policy increases the total money supply in the economy, the contractionary policy decreases the total money supply in the, economy. ,Expansionary policy is traditionally used to combat unemployment in a recession by lowering the interest rates while contractionary policy involves raising interest rate in order to' combat inflation. Monetary policy is, contrasted with fiscal policy, which refers to government borrowing, spending and. taxation.

Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can' be borrowed and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth (output growth), output growth with other currencies and employment. Where currency is under a monopoly, of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the system authority has the ability to alter the money supply and thus influence the interest rate (in order to achieve' Policy goals). The beginning of monetary policy as such comes from the late 19th, century, where it was used to maintain the gold standard.

A policy is referred to as contractionary if it reduces the size of the money supply, or-raises the interest rate, An expansionary policy increases the size of the money: supply, or decreases' the interest rate. Furthermore, monetary policies are described, as follows: accommodating, if the interest rate set by the monetary authority is 'intended to create economic growth: neutral if it is intended neither to create economic growth nor combat inflation: or tight, if intended to reduce inflation.

There are several monetary policy tools available to achieve these ends: increasing interest rate, by flat: reducing the monetary base and increasing reserve requirements. All have the effect of contracting the money supply; and if reserved, expand the money supply. Since the 1970s, the BRETTON WOODS system still ensured that most nations would form the two policies separately, Within almost all modem nations, special institutions (such as ,the Bank of England, the European Central Bank the Federal Reserve in the United States, The reserve Bank, of India, the Bank of Japan or the Bank of Canada) ,exist which have the task of executing the monetary policy and often independently of the ,executive. In general, these institutions are called central banks and often have oilier responsibilities such as supervising the full operation of the financial system.

The primary tool of monetary policy is open market operations. This entails managing quantity of money in circulation through the buying and selling of various credit instruments, foreign currencies or commodities. All of-these purchases or sales results in more or less base currency entering or leaving market circulation.

Usually the short term goal of open market operation is to achieve a specific short term interest rate target in other instances, monetary policy might instead entail the targeting of a specific output growth relative to some foreign currency or else relative to gold. For example, in the case of USA, the Federal Reserve targets the federal fund rate, the rate which member banks lend to one another overnight, However the monetary policy of China is to target the output growth between the Chinese Renminbi and a basket of foreign currencies.

The other primary means of conducting monetary policy include:

(i) Discount window lending (lender of last resort)

(ii) Fractional deposit lending (changes in the reserve requirement)

(iii) Moral suasion (cajoling certain market players to achieve specified. outcomes)

(iv) "Open mouth operation" (talking monetary policy with the market),

1.2 Statement Of The Problem
Industrialization has always constituted a major objective of development strategy and government policy. Through industrialization, developing nations aspire to achieve higher economic growth, and to eventually attain developed nation status. Yet, it remains doubtful whether the approach of industrial policy-making in Nigeria has indeed been successful in transforming the economy. Over the past three decades, the outlook of output growth and development in Nigeria has been gloomy and uncertain. Industrial output, measured in terms of aggregate index and its contribution to GDP has fluctuated very widely.

The industrial contribution to GDP which went up from 17.2 percent in 1996 to 18.1 percent in 1998, declined to 16.1 percent in 2002. Existing evidence highlights the main contribution to industrial development in Nigeria to include such diverse problems as poor infrastructure, scarce human capital, and limited access to inputs, high macro-volatility, poor legal and judicial system, small product market and thin financial market (Obitayo, 1991, Asogwa ,2003, Nnanna, 2003).

One of the major objectives of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years, inflation still remains a major threat to Nigeria’s output growth. Nigeria has experienced high volatility in inflation rates. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent. The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real output growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade.

1.3 Objectives Of The Study
The general objective of this study is to examine monetary policy in Nigeria in relation to its impact on output growth. To achieve that, this topic will pursue the specific under listed objectives.

(i) To ascertain if monetary policy instruments have impact on output growth in Nigeria, if it does to ascertain the relationship.

(ii) To examine if long run relationship exists between monetary policy instruments and output growth in Nigeria.

(iii) To examine if causality exists between monetary policy instruments and output growth in Nigeria.

1.4 Hypotheses Of The Study
The following hypothesis will guide this study:

1. H0: Interest rate, output growth and inflation do not respond to shocks in monetary policy rate (MPR).

H1: Interest rate, output growth and inflation responds to shocks in monetary policy rate (MPR).

2. Hi: Monetary policy instruments have significant impact on output growth in Nigeria.

(ii) Ho: long run relationship does not exist between monetary policy instruments and output growth in Nigeria

1.5 Significance Of The Study
Investors: Both the foreign and local investors will benefit from this work since the research exposes the impact of several monetary policy regimes on output growth. This will enable the investors to know when to and when not to invest.

Policy Makers: This research will also be beneficial to the policy makers seeing that the work .will reveal the impact of monetary policy instruments on· output growth in. Nigeria. This will help the policy makers know the efficient monetary policy to make regarding certain output growths: foreign or local.

1.6 Research Methodology
The method to be used in approaching this subject matter shall be descriptive. It will involve the employment of tabular analysis of data and graph or both. The source of data for the purpose of this essay shall be through primary and secondary sources. This will however be through regression analysis. The secondary data shall include information from journals of commercial banks, specialized banks and the Central Bank of Nigeria (CBN). Also, collections of information from the financial statement of some specialized credit bodies.

1.6 Scope Of The Study
This study covers the Nigerian economy from 1970 to 2016. That is, a period of thirty seven (37) years. The choice of this period is based on the availability of data and the fact that it is a time series analysis.

1.7 Plan Of The Study
The project work is divided into five chapter which are as follows; Chapter one consists of the introduction, statements of the problem, aims and objectives of the study, research questions, research hypotheses, research methodology, scope of the study, significance of the study. Chapter two consists of the literature review of the study. Chapter three consists of the research methodology. Chapter four consists of the data analysis, presentation and interpretation of the result finding while chapter five consists of the summary of finding, conclusion and recommendation, then the bibliography.

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Item Type: Project Material  |  Attribute: 70 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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