EFFECTIVENESS OF MONETARY POLICY AS AN INSTRUMENT FOR ECONOMIC DEVELOPMENT.
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EFFECTIVENESS OF MONETARY POLICY AS AN INSTRUMENT FOR ECONOMIC DEVELOPMENT.
ABSTRACT
INTRODUCTION
The subject of this project effort is the effectiveness of monetary policy as a tool for economic development.
It also encompasses the numerous policies implemented in an economy to achieve economic development, including the creation and effective execution of monetary policies.
Nigerian monetary policy is best understood in terms of the bank’s mandate. Monetary policy was considered in a restricted sense, influencing aggregate expenditure through the regulation of interest rates, credit availability, and credit distribution.
Personal observation, a questionnaire, and secondary material consultation will be the primary data gathering instruments employed in this study.
This chapter of the project will present the research in question. It will also provide an overview of the study’s scope, purpose, importance, problem statement, study limitations, and definitions of significant words utilised in the investigation.
This chapter, however, which is a literature review, will provide an overview of the effectiveness of monetary policy as an instrument of economic development. It will also highlight the role of the Central Bank of Nigeria (CBN) and evaluate its performance in influencing various monetary policies.
It conducts a critical examination of the project’s primary components, which include the procedure for collecting and treating research questions, sample and sampling techniques, and data collection limits.
This part of the project is commonly named Presentation, Analysis, and Interpretation of Data and Results. Here will be a summary of the data studied in earlier chapters. It includes data interpretation as well as the findings.
This is the final chapter, which will contain the deductions, recommendations, and conclusions. It will also provide a summary of the entire research, a conclusion to the findings, and recommendations for future improvements in the effectiveness of monetary policy as an instrument of economic development.
Chapter one
1.0 Introduction
Economic management and national development are dependent on information, manipulation, and the implementation of appropriate economic policies.
The policies cover the monetary, fiscal, and external sectors. The various policies do not work in isolation, but rather complement one another in achieving any country’s economic growth goals. The development of any economy revolves around the formulation and effective implementation of monetary policy.
The essence of monetary policy has remained district and ill until recently for two reasons.
Monetary policies were reviewed in a narrow perspective, with the goal of influencing aggregate spending through interest rate regulation, credit availability, and credit allocation.
The view on the role of money and monetary policies was dominated by the preventing perception of the growth process itself, and modern growth theory has yet to assign money a meaningful function.
The Central Bank of Nigeria (CBN) defines monetary policy as a set of measures meant to control the value supply and cost of money in an economy in accordance with the degree of economic activity.
The best way to understand Nigerian monetary policy is to look at the Bank’s mandate. The Central Bank of Nigeria’s fundamental mandate is outlined in the Central Bank of Nigeria Act (1958), as modified (1997, 1998), and includes:
– The issuance of legal loan currency notes and coins in Nigeria.
– Maintaining Nigeria’s foreign reserves to protect the international value of the legal currency.
– Promote and maintain monetary stability by serving as bankers.
– Serving as the lender of last resort for the banks.
The CBN proposes monetary policy through a memorandum titled “Monetary Credit, Foreign Trade, and Exchange Policy Proposals” that is always intended for a specific fiscal year.
The memorandum is originally reviewed by the committee of governments, the CBN’s highest administrative body in charge of day-to-day operations. The bank’s board of directors first discusses it, then amends it if needed, then approves it.
The CBN then sends the ideas to banks and other financial institutions in the form of monetary policy circulars for compliance; penalties for noncompliance are also specified in the circular.
In a nutshell, the goals of monetary policy are to contain inflation, maintain a healthy balance-of-payments position to protect the external value of the national currency, and encourage adequate and sustainable economic growth.
1.1 Statement of the Problems
Monetary policy is one of the most important government policy strategies for controlling and improving the economy. The Central Bank of Nigeria was founded to implement monetary policy, issue banknotes, and monitor and regulate the country’s financial system. Efficient monetary policy results in price stability, which creates the enabling environment for economic growth.
Having an autonomous monetary institution, allows for the separation of power to spend money from the power to create money, and this separation of the Central Bank of Nigeria from the political process enables it to adopt the medium and long term perspectives essential to conducting effective monetary and financial The goal of monetary policy has remained the achievement of internal and external balance.
However, the Central Bank of Nigeria has put focus on developing an annual monetary programme that establishes targets for the growth rate of monetary aggregates such as broad money, net foreign assets, and domestic credit, among others. These aims are aligned with the expected rate of economic growth for that year.
The impact of this strategy will be more obvious if capital flows are liberalised, the open market operation (OMO) tool is made more appealing, and formal financial markets’ activities are better understood.
1.2 PURPOSE OF STUDY
The study paper explores the transmission channel mechanism via which monetary policy affects economic activities, with a special focus on the Nigerian economy, and how effective it has been in promoting Nigerian economic development.
The Central Bank of Nigeria’s ability to ensure monetary stability is critical to its success in carrying out its tasks. Money’s ability to function as a medium of exchange, store of value, standard of deferred payment, and unit of account is contingent upon price stability. Monetary stability depends on a central bank’s capacity to develop and implement effective monetary policy.
Although there is no agreement on how monetary policy affects the economy, the liquidation or interest rate, credit, and exchange rate channels of monetary were identified.
Furthermore, understanding how the Central Bank of Nigeria implemented a medium-term monetary policy framework to free monetary policy implementation from the problem of time inconsistency and minimise overreaction due to temporary shocks is critical for improving the economy’s overall performance.
1.3 Significance of the Study
Based on the facts shown above, this research is recommended as relevant and valuable for lectures, students, policymakers, investors, and financial organisations. This study will continue to demonstrate the effectiveness of monetary policy as a tool for economic development or nation-building.
Not only that, but it will also provide insight into how the Central Bank of Nigeria changes the level of money in the economy through indirect instruments such as the Required Reserves level, the Minimum Rediscount Rate (MRR), the Open Market Operation (OMO), Treasury Bill sales in the primary market, discount and rediscount operations, and CBN certificates.
The bank uses these monetary policy instruments to alter the amount of currency in circulation and interest rates in order to achieve its annual monetary policy goals.
1.4 Scope of the Study
The research focuses on the effectiveness of monetary policy as a tool for economic development. The study also examined how the instrument used to attain monetary policy objectives has changed throughout time.
There are two significant eras in the pursuit of monetary policy: before 1986 and since 1986. The first phase focuses on indirect monetary controls, whereas the second relies on market processes.
This research is also based on financial facts compiled from deposit money bank returns and rigorously tested before being adopted by the Central Bank of Nigeria.
Also, statutory data produced by agencies such as the Federal Office of Statistics and the Federal Ministry of Finance are based on primary data collected by the Central Bank of Nigeria through field surveys and compiled using tested theoretical frameworks and various computation methodologies.
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