Since its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a central bank, which is the regulation of the stock of money in such a 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 (Fasanya et al, 2013; Adesoye et al, 2012). Over the years, the major goals of monetary policy have often been the two later objectives. Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on assumption that these are essential tools of achieving macroeconomic stability (Aliyu and Englama, 2009).

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 interest and exchange rates, 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 rates.

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 sectoral 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-1970s on the basis of their total deposit liabilities, but since such cash ratios were usually lower than those voluntarily maintained by the banks, they proved less effective as a restraint on their credit operations.

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 (Okwu et al, 2011; Adesoye et al, 2012). For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, 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.

The importance of price stability derives from the harmful effects of price volatility, which undermines the ability of policy makers to achieve other laudable macroeconomic objectives. There is indeed a general consensus that domestic price fluctuation undermines the role of money as a store of value, and frustrates investments and growth. Empirical studies (Ajayi and Ojo, 1981; Fischer, 1994) on inflation, growth and productivity have confirmed the long-term inverse relationship between inflation and growth.

With the achievement of price stability, the conditions in the financial market and institutions would create a high degree of confidence, such that the financial infrastructure of the economy is able to meet the requirements of market participants. Indeed, an unstable or crisis-ridden financial sector will render the transmission mechanism of monetary policy less effective, making the achievement and maintenance of strong macroeconomic fundamentals difficult. This is because it is only in a period of price stability that investors and consumers can interpret market signals correctly. Typically, in periods of high inflation, the horizon of the investor is very short, and resources are diverted from long-term investments to those with immediate returns and inflation hedges, including real estate and currency speculation. It is on this background that this study would investigate the effectiveness of the monetary policy in Nigeria with special focus on major growth components.

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 economic 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 economic 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.

The first period of inflation in the 30 percent range (12months moving average) was in 1976 (CBN, 2009). One of the factors often adduced for this inflation is the drought in Northern Nigeria, which destroyed agricultural production and pushed up the cost of agricultural food items, a significant increase in the proportion of the average consumer’s budget. In addition, during this period, there was excessive monetization of oil export revenue, which might have given the inflation a monetary character.

In addition, in the late 1980’s, following the Structural Adjustment Program, the effects of wage increases created a cost-push effect on inflation. In the long run, it was the structural characteristics of the economy, coupled with the growth in money supply that translated these into permanent price increases. In 1984, inflation peaked at 39.6 per cent at a time of relatively little growth in the economy. At that time, the government was under pressure from debtor groups to reach an agreement with the International Monetary Fund, one of the conditions of which was devaluation of the domestic currency. The expectation that devaluation was imminent fuelled inflation as prices adjusted to the parallel rate of exchange. Over the same period, excess money growth was about 43 percent and credit to the government had increased by over 70 percent (CBN, 2010).

In other respects the cause of the inflation may also be adduced to the worsening terms of external trade experienced by the country at that time. It is possible therefore that Nigeria’s inflationary episodes were preceded by structural or real factors followed by monetary expansion.

The third high inflation episode started in the last quarter of 1987 and accelerated through 1988 to 1989. This episode is related to the fiscal expansion that accompanied the 1988 budget. Though initially the expansion was financed by credit from the CBN, it was later sustained by increasing oil revenue (occasioned by oil price increase following the Persian Gulf War) that was not sterilized. In addition, with the debt conversion exercise, through which “debt for equity” swaps took place, external debt was repurchased with new local currency obligations. However, with the drastic monetary contraction initiated by the authorities in the middle of 1989, inflation fell, reaching one of its lowest points in 1991 i.e 13% (CBN, 2010).

The fourth inflationary episode occurred in 1993, and persisted through the end of 1995. Though inflation gathered momentum towards the tail end of 1992, it reached 57 percent by the end of 1994, the highest rates since the eighties, and by the end of 1995, it was 72.8 per cent (CBN, 2009). As with the third inflation, it coincided with a period of expansionary fiscal deficit and money supply growth. The authorities found it too difficult to contain the growth of private sector domestic credit and bank liquidity. Continuous fall of the inflation rate has been experienced since 1996 as a result of stringent monetary policies of the Central bank. It however, increased in 2001, 2003, 2005, 2008, and 2012 to 16.49%, 23.84%, 11.56%, 15.1% and 12% respectively (CBN, 2010; CBN, 2011, CBN, 2012).

Structural factors have proven to be important in the inflation spiral. Reduction in oil revenue (a supply shock) led to a reduction in real income, with serious distributional implications. As workers pushed for higher nominal wages, while producers increased mark-ups on costs, an inflationary spiral followed. In addition to these factors the government also had a transfer problem in order to meet debt obligations.

The failure of the monetary policy in curbing price instability has caused growth instability as Nigeria’s record of development has been very poor. In marked contrast to most developing countries, its GDP was not significantly higher in the year 2000 that it was 35 years before. As many economic indicators show, 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 2000. 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, 1992-2012 Wobbling.

The main thrust of this study is to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go along way in assessing the extent to which the monetary policies have impacted on the growth process of Nigeria using the major objectives of monetary policy as yardstick.

The main objective of this study is to assess the effectiveness of the monetary policies in Nigeria. However, the following specific objectives would also be achieved.
(i) To examine the trend and structure of monetary policy in Nigeria;
(ii) To empirically investigate the impact of the monetary policy on economic growth and other major growth components in Nigeria;
(iii) Evaluate the performance of monetary policy in Nigeria over the years.

The hypotheses to be tested in the course of this research work are:
(1) H0 - That the monetary policy instruments do not have significant impact on the economic growth in Nigeria.
H1 - That the monetary policy instruments have significant impact on the economic growth in Nigeria.

(2) H0 - That the monetary policy instruments do not impact significantly on the general price level in Nigeria.
H1 - That the monetary policy instruments impact significantly on the general price level in Nigeria.

(3) H0 - That the monetary policy instruments do not impact significantly on the Balance of payment equilibrium of Nigeria.
H1 - That the monetary policy instruments impact significantly on the Balance of payment equilibrium of Nigeria.

The Ordinary Least Square (OLS) technique shall be employed in obtaining the numerical estimates of the coefficients in different equations. The OLS method is chosen because it possesses some optimal properties; its computational procedure is fairly simple and it is also an essential component of most other estimation techniques. The estimation period covers the period between 1981 and 2012.

In demonstrating the application of Ordinary Least Square method, the multiple linear regression analysis will be used with Gross Domestic Product (GDP), inflation rate and balance of payment as the dependent variables while liquidity ratio, cash ratio, money supply as the explanatory variables. The method would be applied with the use of Statistical Package for Social Sciences (SPSS).

The data for this study shall be obtained mainly from secondary sources, particularly from Central Bank of Nigeria (CBN) publications. This study makes use of econometric approach in estimating the relationship between selected monetary policy components and major growth components.

gdp = a0 + a1lr + a2M2 + a3Cr + Ui
Where gdp - Gross Domestic Product at 1990 Constant Basic Prices
Lr - Liquidity ratio
M2 - Broad Money Supply
Cr - Cash ratio
a0, a1, a2 and a3 - Parameters
Ui - Error term

inf = b0 + b1lr + b2M2 + b3Cr + Ui
Where inf - Inflation rate
lr - Liquidity Ratio
M2 - Broad Money Supply
Cr - Cash ratio
b0, b1, b2 and b3 - Parameters
Ui - Error term

bop = c0 + c1lr + c2M2 + c3Cr + Ui
Where bop - Balance of Payment
lr - Liquidity Ratio
M2 - Broad Money Supply
Cr - Cash ratio
c0, c1, c2 and c3 - Parameters
Ui - Error term

Nowadays, most African scholars and policymakers increasingly subscribe to a conventional view of central banking. That view prioritizes the objective of monetary policy much more strongly than did either theoretical orthodoxy or the African central banks themselves in the 1960s and 70s. The time consistency literature, in particular, argues that central banks that fail to specialize in monetary stability – making low inflation a clearly overriding priority as against output stabilization, fiscal support to government, or a competitive real exchange rate – end up with excessive inflation and with no offsetting gains in economic performance. There is little room for African Central Banks to play active development role; rather, long-run growth is promoted through the maintenance of low inflation, which increases investment and growth by reducing macroeconomic uncertainty.
This study is significance in the following ways:
1. It would provide an objective view of the effectiveness of the monetary policy in Nigeria;
2. The study would also provide an econometric basis upon which to examine the effect of monetary policy on the Nigerian economy;
3. Lastly, it would provide policy recommendations to policy-makers on ways to make the Nigerian economy vibrant through the monetary policy.

The economy is a large component with lot of diverse and sometimes complex parts. This study will only focus on major growth components such as the gross domestic product, price level, exchange rate and the balance of payment equilibrium. This study will cover all the facets that make up the monetary policy, but shall empirically investigate the effect of the major ones. The empirical investigation of the impact of the monetary policy on the macroeconomic variables in Nigeria shall be restricted to the period between 1981 and 2012. The study would also examine the monetary policy regimes that have adopted in Nigeria since 1960 to date as well as evaluate its performance.

This study shall contain five chapters. The first chapter contains the background of the study, the statement of the research problem, the objectives of the study, the research questions etc that will guide the study. Chapter two shall present the literature review on the subject matter. The focus of chapter three is the research methodology. The empirical analysis i.e. presentation and interpretation of the regression results and other necessary data would be made in chapter four. The last chapter i.e chapter five, would present the summary of the findings, conclusion and appropriate recommendations.

Adesoye, A. B.; Maku, O. E. and Atanda, A. A. (2012) “Is Monetary Policy a Growth Stimulant in Nigeria? A Vector Autoregressive Approach”. Munich Personal RePEc Archive (MPRA). Paper No. 35844, pp. 1-24.
Ajayi, I. (1999) “Evolution and Functions of Central Banks”. Central Bank of Nigeria Economic and Financial Review. Vo. 37, no. 4, pp. 11-27.
Ajayi, S. I. and Ojo, O. O. (1981) Monetary and banking analysis and policy in the Nigerian context. London: George Allen and Union Ltd.
Aliyu, U. R. and Englama, A. (2009) “Is Nigeria Ready for Inflation Targeting?” Journal of Money, Investment and Banking. Issue 11, pp. 27-44
Central Bank of Nigeria (2012) Statistical Bulletin, Vol. 23. Abuja: Central Bank of Nigeria.
Central Bank of Nigeria (2011) Annual Report and Statement of Accounts. Abuja: Central Bank of Nigeria.
Central Bank of Nigeria (2010) Statistical Bulletin. Abuja: Central Bank of Nigeria.
Central Bank of Nigeria (2009) Statistical Bulletin. Abuja: Central Bank of Nigeria.
Fasanya, I. O.; Onakoya, A. B. O and Agboluaje, M. A. (2013) “Does Monetary Policy Influence Economic Growth In Nigeria?” Asian Economic and Financial Review. Vol. 3, no. 5, pp. 635-646.
Fischer, S. (1994) Modern Central Banking. In: The Future of Central Banking, the Tercentenary Symposium of the Bank of England. Cambridge University Press.
Folawewo, A. O. and Osinubi, T. S. (2006) “Monetary Policy and Macroeconomic Instability in Nigeria: A Rational Expectation Approach”. Journal of Social Science. Vol. 12, no. 2, pp. 93-100.
Okwu, A. T.; Obiakor, R. T.; Falaiye, O. B. and Owolabi, S. A. (2011) “Empirical Analysis of the Effects of Monetary Policy Innovations on Stabilization of Commodity Prices in Nigeria”. European Journal of Economics, Finance and Administrative Sciences. Issue 32, pp. 64-79.
Soludo, C. (2001) Debt, Poverty and Inequality: Towards an Exit Strategy for Nigeria and Africa. Proceedings, International Conference on Sustainable Debt Strategy, Abuja, Nigeria.



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Keywords: monetary policy, what is monetary policy, monetary policy definition, expansionary monetary policy, contractionary monetary policy, define monetary policy, tools of monetary policy, nigeria economic growth, economic growth in nigeria



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