ASSESSMENT ON THE EFFECTIVENESS OF MONETARY POLICY ON ECONOMIC STABILIZATION.
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ASSESSMENT ON THE EFFECTIVENESS OF MONETARY POLICY ON ECONOMIC STABILIZATION.
Chapter one
INTRODUCTION
1.0 Background Study
Economies around the world experience one type of fluctuation or another at various times. These changes are typically beyond the market’s ability to absorb them through price movements. Hence, market failure.
All central banks, including the Central Bank of Nigeria, strive to promote and preserve monetary stability and a stable financial system. The premise is that this will foster long-term planning, facilitate infrastructure development, attract foreign investment, and promote economic growth.
While the central bank is solely responsible for the implementation of sound monetary policies to aid in the achievement of the aforementioned objectives, the formulation of fiscal policies, which also affects the achievement of the aforementioned objectives, falls to the larger government, specifically the Ministry of Finance.
Given how much monetary and fiscal policies influence economic growth and development, it is not surprise that they are inextricably linked. This relationship was specifically explained as follows:
Monetary policies are intricately intertwined in macroeconomic management; developments in one sector have a direct impact on the other. Undoubtedly, monetary policy is often concerned with using changes in the money supply and/or interest rates to impact the level of economic activity.
It is based on the implementation of all or some of the following policies: open market operations, liquidity rationing, rediscount policy, minimum reserve requirements, and sectoral credit guidelines.
Fiscal policies, on the other hand, involve the use of taxes and changes in government spending to influence the amount of economic activity (Ekpo, 2003, p.15), which has an impact on citizens’ and firms’ disposable income as well as the general business climate. In this aspect, the link between public spending and private sector performance is critical.
On the one hand, government spending can stimulate private sector growth, but it can also be detrimental if it results in budget deficits and competition for scarce financial resources from the banking sector as the government attempts to finance the deficit.
In such cases, the Government’s crowding out of the private sector may outweigh the short-term benefits of an expansionary fiscal policy.
The key to all of this is to strike the right balance in fiscal management. Having enough expenditure outlays to meet the demands of the government and encourage growth while not depriving the private sector of the resources it requires to invest and thrive.
This has the ability to destabilise the macroeconomic climate, consequently reducing economic productivity and development. The purpose of this research is to review Nigeria’s monetary behaviour since independence.
In doing so, we intend to investigate the following issues: the relationship between government and development; how monetary policy has impacted previous developmental projects in the country; and the challenges of implementing monetary policy in a deregulated environment and during a period of globalisation.
According to classical economics, the “invisible hand” of the price mechanism directs the economy by determining what, how, and for whom commodities and services are produced. It is commonly recognised that Adam Smith’s “invisible hand” price mechanism has failed to successfully stabilise the economy in practice.
This could be related to the creation of market imperfections, which occur when the market fails to efficiently allocate and distribute scarce economic resources.
Given this, in order to achieve a second-best condition, the government typically implements fiscal and income policies to mitigate the impact of these swings. In this study, we are interested in monetary policy instruments and their effectiveness in an import-dependent economy.
In order to define monetary policy, the term “policy” is first defined as a formalised notion or activity used to attain certain aims or objectives. Overall, monetary policy can be defined as the government’s plans or activities taken through the monetary authority to manage the volume, supply, and cost of money in order to attain specific goals and objectives.
The Oxford Dictionary of Economics (2003) defines “stability” as the ability of a system to return to its former state following a disturbance, or to accelerate the rate at which it does so.
Thus, the phrase “Economics Stability” cannot be defined as anything other than economic stability or a state of static equilibrium. Rather, economic stability can be described as a scenario in which a disturbance or distortion does not have a negative impact on the system.
Without a doubt, the volume and growth of the money stock, as well as the structure of interest rates, have a significant impact on the macroeconomic operation.
As a result, the purpose of this study is to evaluate the effectiveness of monetary policy as a tool for economic stabilisation.
1.1 Statement of Problem
1. There is no agreement among economists from various schools of thought on the efficiency or even acceptability of employing monetary policy as a weapon of economic stabilisation.
2. Although the Central Bank of Nigeria (CBN) has made some headway in correcting the structural imbalance in the economy, there is still a lot of dispute on monetary policy in Nigeria.
3. There is also the issue of determining which aim should be allocated to monetary policy, as it cannot be utilised to achieve or pursue all macroeconomic goals. This is due to aim conflicts and trade-offs among certain macroeconomic aggregates. The purpose of this study is to address these issues.
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