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Certification ———————————————————————— i
Acknowledgement —————————————————————-ii
Dedication ————————————————————————–iii
Abstract —————————————————————————–iv
1.1 Introduction —————————————————————-1
1.2 Background of the study ————————————————-1
1.3 Statement of the problem ———————————————–7
1.4 Objectives of the study —————————————————8
1.5 Statement of hypothesis ————————————————-9
1.6 Scope and limitations of the study ————————————-9
1.7 Significance of the study ————————————————-9
2.0 Literature review ————————————————————11
2.0.1 Conceptual definition of monetary policy —————————–11
2.0.2 Evolution of the monetary policy framework in Nigeria ————12
2.0.3 Review of the monetary policy before the Structural
Adjustment Programme (SAP) ————————————————–16
2.1 Theoretical literature review ———————————————19
2.1.1 Monetary policy under the Structural Adjustment
Programme (SAP) —————————————————————–19
2.1.2 Nigeria monetary policy experience ————————————-23
2.2 Empirical literature review ———————————————–28
2.2.1. Framework of monetary policy in targeting inflation —————28
2. 2.2 An appraisal of the performance of monetary policy in Nigeria –30
2.2.3 Suggestion for dealing with inflation in Nigeria ———————–33
3.0 Research methodology ——————————————————-37
3.1 Model specification ———————————————————–37
3.2 Method of evaluation ——————————————————–39
3.2.1Unit root test —————————————————————–39
3.2.2Presentation of co-integration and error corrections —————-40
3.2.3 Diagnostic tests ————————————————————–40
3.3 Justification of the model —————————————————-40
3.4 Research approach ———————————————————–41
4.0 Presentation of data and discussion of results ————————–42
4.1 Presentation of data ———————————————————-42
4.1.1 Unit Root Test —————————————————————-42
4.1.2 Co-integration Test ———————————————————-45
4.2 Economic Opinion, Interpretation/Appriori Criteria ——————–48
4.3 Statistical Criteria of the Results ———————————————48
4.3.1 T-test —————————————————————————-48
4.3.2 F-test —————————————————————————-49
4.4 Economic Criteria —————————————————————50
4.4.1 Test for Autocorrelation —————————————————–50
4.4.2 Normality test ——————————————————————51
4.4.3 Test for multicollinearity —————————————————–52
Summary ——————————————————————————-55
Conclusion ——————————————————————————58
Recommendations ——————————————————————–59
Bibliography —————————————————————————-61
The purpose of this project work is based on the relative performance of monetary policy in the
Nigerian economy. This work discussed the meaning of monetary policy is as combination of
measures designed to regulate the value, supply and cost of money in an economy in
consonance with the expected value of economies activities. The study shows further, the aims
and objectives of monetary policy which includes price stability, maintenance of balance of
payment equilibrium, promotion of employment, tackling inflation, output growth and
sustainable development. The literature review shed more light on conceptual and evolutionary
framework of monetary policy in Nigeria, review of monetary policy before and offer the
structural adjustment programme (SAP), and appraisal of the performance of monetary policy
in Nigeria were thoroughly discussed. also appropriate measures for managing inflation in the
economy were also suggested from the research instruments and techniques, if was observed
that there are leakages in velocity of money through corrupt practices in the system and
diabolic means of creating cash flow which causes inflation, multiplicity of unemployment and
low output growth. The research work, also showed the interplay between the gross domestic
product (GDP) and other monetary policy variables (real exchange rate, real interest rate,
money supply and liquidity ratio), and their respective contribution to the economy. In
conclusion this project suggests total means of curling corruption using the various law
enforcements in the country.

For most economies, the objectives of monetary policy include price stability,
maintenance of balance of payments equilibrium, promotion of employment and
output growth, sustainable development. 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
effect of price volatility which undermines the objectives. This is indeed a general
consensus that domestic price fluctuations undermines the role of monetary
values as a store of value, and frustrate investments and growth.
Ajayi and Ojo (1981) and fisher (1993), empirical states on inflation,
growth and productivity have confirmed the long run inverse relationship
between inflation and growth. When decomposed into its components, that is
growth due to capital accumulation, productivity growth, and the growth rate of
the labour force, the negative association between inflation and growth has been
traced to the strong negative relationship between it and capital accumulation as
well as productivity growth respectively. The importance of these empirical
findings is that stable prices are essential for growth due to capital accumulation,
productivity growth, and the growth rate of the labour force, the negative
association between inflation and growth has been traced to the strong negative
relationship between it and capital accumulation as well as productivity growth
respectively. The importance of these empirical findings is that stable prices are
essential for growth. The success of monetary policy depends on the operating
economic environment, the institutional framework adopted, and the
implementation of monetary policy is the responsibility of the central bank of
Nigeria (CBN). The mandates of the CBN as specified by the CBN Act of 1958
 Issuance of legal tender currency.
 Maintaining external reserves to safeguard the international value of the
 Promoting monetary stability and a sound financial system.
 Acting as banker and financial adviser to the federal government.
However, the current monetary policy framework focuses on the maintenance of
price stability while the promotion of growth and employment are the secondary
goals of monetary policy. The performance of monetary policy depends on some
legal framework upon which it operates. The legal framework are quantitative
general or indirect and second, qualitative selective or direct. The effect effects
the level of aggregate demand through the supply of money, cost of money and
availability of credit. Out of the two types of instruments, the first category
include bank are variations, open market operation, and required reserve ratio.
They are meant to regulate the overall level of credit in the economy through
commercial banks. The selective credit control aims at controlling specific types of
credit. This includes changing margin requirement and regulation of consumer’s
credit (M.L Jhingan, 2003).
In any economy, the conducts of both policies are normally rooted through
banking institutions that play in the intermediation process. The role of bringing
lenders and borrowers together through this process the central bank plays a very
important role in determining the price of money (Ebhodaghe, 1996). Therefore,
monetary policy is important in its own right from the past view of monetary
economists and policy maker’s interns of its impacts on the economy. Of all tools
available to government for directing the cause of the economy, monetary
policies have proven to be the most visible instrument for achieving medium term
stabilization objectives (CBN guideline 2002). Indeed monetary policy formulation
and implementation emerged as a critical government responsibility so that the
economy does not go astray. Policies are made not only for their own sake rather
for achieving some desired goals over a given period of time.
Generally, the primary objectives of monetary policy is concerned with the
application of expansionary monetary policy measures during economic recession
and contractionary monetary policy controls money supply because it is believed
that its rate of growth has an effect on inflation. The basic aim of monetary
policies is not to aggregate themselves but the aggregate in the real sectors of the
economy such as, level of capital price stabilization and economic development.
Policies are designed in order to change the trend of some monetary variables in
particular direction so as to induce the desired behavioral change in the monetary
policy. The central bank’s role is to conduct appropriate monetary policy that is
consistent with the main economic objectives that will help the growth of gross
domestic product (GDP), sustainable inflation are and stable balance of payment
position. This is done by putting in place the direct or indirect monetary approach
so as to control monetary trends. In this regards the CBN determines the amount
of money to be supplied that is consistent with the nation’s macro-economic
objectives and manipulate the monetary instrument at its disposal in order to
achieve the stated objectives. Monetary policy influences the macrocosmic
objectives because it is believed that there occurs a relationship between the real
variables. Monetary policy affects all aspects of our economic and financial
decisions whether to buy a car, build a house, start up a business or to expand the
existing ones, whether to send one’s child to school or to make the child learn
trade. Money supply or monetary policy tries to influence the performance of the
economy as reflected in key macro-economic indicators like inflation, GDP and
employment. It works by affecting aggregate demand across the economy, that is,
individuals’ and firms’ willingness and stability to spend on goods and services. In
doing this, monetary policy has two fundamental goals to promote maximum
sustainable output and employment and to maintain sustainable price level in the
economy. The job of stabilizing output in the short run and promoting price
stability in the long run involves several steps first, the central bank tries to
estimate how the economy is doing now and how it is likely to do in the medium
term, then, it compares this estimates to its goals for the output and the price
level, if there is a gap between the estimates and the goals, the CBN have to
decide on how forcefully and swiftly to act to close the gap. Estimate of the
current economic conditions are not as even as the most up-to-date data on key
variables like employment, growth, productivity etc, largely reflect condition in
the past. So to get a reasonable estimate of the current and medium term
economic conditions, the central bank tries to find out what the most relevant
economic developments are such as government spending, economic conditions
abroad, financial conditions at home and abroad and the use of new technologies
that boos productivity. These developments are the incorporated in an economic
model to see how the economy is likely to evolve over time. In doing this, the
central bank is confronted with some unexpected development such as the NigerDelta crisis that disturbed the oil production and slowed down the revenue
generation by the government they therefore, have to build uncertainties into
their model. Uncertainty seems to be problem at every part of the monetary
policy process there is yet no set of policy and procedures that policy makers can
use to deal with all situations that may arise. Instead, policy makers must decide
how to precede by analysis the issue is far from being settled. Indeed, the central
bank spends a great deal of time and effort in researching into the various ways
to deal with different kinds of situation. Since these issues are not likely to be
resolved very soon, the central bank is likely to continue to look at everything.
Nigeria did not have any stable macroeconomic policy enforcement before and
during the inflammation of structural adjustment programme (SAP). The terms of
trade deteriorated for most of the period between 1980 to 1985 and some
previous years before the 1980. The consumer price index (CPI) growth rate was
on the average of 17.1% between 1980 and 1985 and though this fell to about
5.0% in 1986 and 1987, if again started to rise from 1988, peaking at 47.5% in
1989. It has remained consistently high in the 1990s reading an all time high of
54.7% in 1994. The current account reported as surpluses between 1989 and
1993 after a fairly long period of deficit between 1981 and 1988 (there was a
moderate surplus in 1984 and 1985 due to the austerity measures embarked
upon by the federal government under the then military administration of general
Babangida). Domestic savings as a ratio of GDP, which stood at an average of
27.7% between 1970 and1980, started to fall in 1981. Between 1981 and 1986, it
stood at 13.8% the instrument ratio has followed the same pattern although,
reporting slightly lower figures. Fiscal deficit has been chronic and is financed by
borrowing from the banking system. The share of commercial banks in total
financial assets has shown a structural shift from about 57.7% in 1986 to 36.4% in
1993, the major gainer has been the central bank whose share has increased from
33.1% to 46.4% during the same period. It is doubtful if the structural adjustment
programme has improved competitiveness in the system as the three largest
banks still amount put a third of total deposits. One major feature of banking in
the period of deregulation is the occurrence of large distress in the banking
system. Close to 42 banks were severely distressed in the system in the system
with 45 percent of loans classified as non-performing loans (CBN 1994). The
performance of major monetary and commercial banks ratios did not show any
appreciable improvement during reforms. For example, total loan and advances
measured as a ratio of GDP declined from 25.6 percent in 1986 to 14.3 percent in
1990. The aggregate domestic credit, GDP ratio which peaked at 50.3 percent in
1986, reduced by half in 1993 (24.5%) with credit to government commanding a
larger proportion. The ratio of both narrow money MI save trend. From a high
trend of 19.2 percent in 1981, MI/GDP ratio phi-meted to 11.5 percent in 1993
and M2/GDP ratio from 30.6 to 20.1 percent following the same pattern severely
negative before the liberalization exercise the deregulation exercise in 1987 yield
interest rate that were mildly negative to positive in the period 1987-1990. But
with pressure on prices thereafter real interest rates have turned severely
negative, again for the period of 1991 to 1994. It can be observed that most
macro-economic aggregates have become severely unstable in recent times it is
in this environment that indirect monetary control was initiated in 1993. Much of
difficulty in achieving the objectives of SAP resulted largely from failure to achieve
fiscal balance and the consequent reliance on borrowing from the central bank to
finance the fiscal deficits. This has adversely affected both the market for foreign
exchange, money and goods and the expected role of market in allocating
resources efficiently. The extent to which open market operations in government
bills can help to successful manage the excess liquidity in the system which is
created by government borrowing from the central bank is one of that while
should be of interest given the enormity of this problem in the attainment of
stabilization goals in the economy.
one a yearly basis, the monetary authority formulate guidelines geared towards
the enhancement and development of policy variable designed to ensure optimal
performance of the banking industry and ultimately to advise the macroeconomic
goals or objectives but in the implementation of such policy variable certain
conflicting issues are to be addressed ranging from the ability to comply with
various monetary policy goodliness as well as satisfying depositors and
shareholders. In fact, commercial banks are reluctant in their responsibility to
comply with the rules and regulations set by the central bank such as the open
market operation (OMO), required reserve ratio (RRr), bank rate, liquidity ratio,
selective credit control and moral suasion. These are the instruments of central
bank in controlling the activities and operations of commercial banks in other to
achieve the macroeconomic objective such as growth, price stability balance of
payment equilibrium, full employment. The central bank of Nigeria (CBN)
guidelines helped in setting of the interest rates charged by the commercial
banks, sales or purchases of securities to control the money supply, and changes
in the required reserve ratios of banks and other financial institutions. The
guidelines affected other interest are both through open market operations to
affect the probability that the banks are going to need to borrow at its own
lending rate, and by the announcement effects of changes in the central bank’s
minimum lending rate, which are regarded by the markets as statement about the
authorities forecasts and objectives. The CBN guideline on monetary policy works
through the effect of the cost and availability of loans to real activity, and through
this on inflation, and on international capital movement and thus on exchange
Central Bank of Nigeria and the federal government’s formulation and
implementation of the monetary policy more or less finds its ultimate translation
to the economy in real terms. The controversy bothering whether or not
monetary policy measures actually impact on the Nigerian economy is a problem
this study sets to solve.
The broad objective of the study is to examine the effectiveness of monetary
policy in the Nigerian economy. The specific objectives are as follows.
 To assess the impact of money supply on economic growth in Nigeria
 To determine the impact of liquidity ratio on economic growth in
 To ascertain the effect of interest rate on Nigeria’s GDP
The hypotheses tested in this study are stated in their will forms as follows
H0: Money supply has no significant impact on GDP in Nigeria
H02: Interest rate in Nigeria has no significant impact on GDP
H03: There is no significant relationship between liquidity ration and GDP in
This work is aimed at examining the performance of monetary policy is on the
Nigerian economy, the effects, the appraisal, and possibly the solution to the
problems facing the implementation and working of monetary policies in Nigeria.
This study will be of great benefit to bankers, investment analysts, government
agencies, academics, private and public sectors more so, it will be useful to
policymakers in the attempt to fashion out dynamic and reliable monetary policy
measure for controlling commercial banks ability to create money and thereby
influence the effective development of the economy.


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