EFFECTIVENESS OF MONETARY POLICY IN ACHIEVING PRICE STABILITY IN NIGERIAN ECONOMY.
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EFFECTIVENESS OF MONETARY POLICY IN ACHIEVING PRICE STABILITY IN NIGERIAN ECONOMY.
Chapter one
1.0 Introduction
Economists and policymakers have long been interested in the effectiveness of monetary policy on economic variables in the Nigerian economy; yet, studies have only been conducted on particular areas of economic variables. These studies are limited and, in any case, do not address the efficiency of Nigeria’s monetary policy for price stability, necessitating this research.
The effectiveness of monetary policy in influencing price stability has been a source of concern for governments for decades. Despite a lack of consensus among economists on how it actually works and the magnitude of its effect on the economy, there is remarkable strong agreement that monetary policy has some effect on the economy (Udegbunam 2003).
Monetary policy is a set of policies aimed to manage the value, supply, and cost of money in an economy in accordance with its level of activity. It can be described as the art of directing the direction and movement of monetary and credit facilities in order to maintain stable prices and economic progress. In an economy (CBN 1992).
In modern economics, the central bank is the entity tasked with using monetary policy instruments to achieve desired macroeconomic goals.
However, the core goal of monetary policy spans beyond the responsibilities of most central banks: maintaining price stability, which is critical to achieving sustainable growth, is the focus of these objectives, as described in the CBN Act of 1958.
– Issue of legal monetary notes and coins. Maintain Nigeria’s external reserve.
– To maintain the international value of the legal tender currency.
– Promoting monetary stability and a strong financial system.
– Serve as banker and financial advisor to the federal government.
– Serve as the lender of last resort.
The pursuit of price stability invariably implies the indirect pursuit of other objectives, such as economic growth, which can only occur in the presence of price stability and financial market allocative efficiency, because inflation is widely regarded as a purely monetary phenomenon with significant economic costs.
The basic purpose of monetary policy is to guarantee that the money supply is consistent with the real income growth target, hence ensuring non-inflationary growth.
The pursuit of price stability through monetary policy thus involves all of the major areas in which the Central Bank can help to stabilise the country’s macroeconomic environment.
1.1 Statement of the Problem
The Central Bank of Nigeria (CBN) has been the sole player in implementing monetary policy to achieve price stability. The Central Bank of Nigeria has failed to establish price stability due to the following:
– A lack of agreement on what constitutes price stability. For example, Shiratsuka (1997) proposes three definitions of price stability, as follows:
– A reasonable aim for the inflation rate (if achieved, assumes the price stability objective is met).
– Sustainable growth underpins price stability, suggesting that price stability is sustained at the inflation rate while maintaining sustainable economic growth.
– Stability of inflation expectations.
– Furthermore, political instability has been identified as one of the challenges confronting the Central Bank of Nigeria (CBN) in establishing price stability through the employment of monetary policies.
1.2 Aim and Objectives of the Study
The purpose of this study is to conduct an in-depth examination of the effectiveness of monetary policy in establishing price stability in the Nigerian economy. This study will evaluate if monetary policy can help achieve price stability.
The study’s aims are as follows.
(a) To investigate the effectiveness of interest rates. In achieving price stability in the Nigerian economy.
(b) Investigate the effectiveness of money supply in achieving price stability in the Nigerian economy.
1.3 RESEARCH QUESTIONS.
(i) What is the effectiveness of interest rate policy in ensuring price stability in the Nigerian economy?
(ii) How will money supply effect price stability in the Nigerian economy?
(iii) How will interest rates and money supply affect price stability in Nigeria’s economy?
(iv) How will interest rates and the money supply affect price stability in the Nigerian economy?
(v) How will the inflation rate effect Nigeria’s economic growth?
(vi) How will interest rates and money availability affect Nigeria’s economic growth?
1.4 Significance of the Study
To examine the effectiveness of monetary policy in maintaining price stability in the Nigerian economy. This study will examine the effectiveness of monetary policy in promoting economic growth.
The benefits of this study will assist policymakers in fine-tuning monetary policy measures and how money should be circulated in the economy. Instructors, acquaintances, and colleagues in the subject of study are among those who profit from this research.
1.5 Research Hypothesis
The research hypothesis is as follows:
Hypothesis 1.
Ho: There is no major difference between the interest and inflation rates.
HA: There is a significant disparity between the interest and inflation rates.
Hypothesis 2.
Ho: There is no significant difference between the money supply and inflation, mate.
HA: There is a significant disparity between money supply and inflation rates.
Hypothesis 3.
Ho: There is no significant difference between the interest rate, money supply, and inflation rate.
HA: There is a significant disparity between interest rates, money supply, and inflation rates.
1.6 Research Methodology
The research technique was specifically developed to assess the effectiveness of monetary policy on price stability in the Nigerian economy over the last seventeen years (17 years): 1993-2009.
In this regard, data sources primarily rely on secondary data collection methods. ‘These take the shape of dailies, statistical research findings such as a Central Bank of Nigeria (CBN) review, and so on, while regression (OLS) will be utilised to solve the collecting data. The methodology will be descriptive and qualitative.
1.6.1 Model Specifications
Model I
Inf Rat equals βo + 1 INTt + Et.
INFt = inflation rate.
Where βo is constant.
The equation’s parameter, β1,
INTt = Interest rate.
Et = Error of the Stochastic Term in Time T
1.8 Scope of the Study
The study’s focus would include the effectiveness of monetary policy in ensuring price stability in Nigeria’s economic development from 1993 to 2009.
1.9 Limitations of the Study
The apparent constraints are listed below:
(a) The ability to obtain appropriate data and information for the aim of the research project.
(a) Another constraint is the availability of funds for the research project.
(c) Another constraint is time, as the research activity is mixed with academic work at school as a final-year student.
1.9 Definition of Terms
Money is something that is widely accepted as a medium of trade and a store of value.
Monetary policy is an instrument used by the Central Bank of Nigeria to regulate the circulation and money supply of an economy.
Inflation is a persistent increase in the price of goods and services.
Stability occurs when prices for specific commodities and services are fixed.
1.10 Organisation of the Study
This study will be divided into five chapters. The first chapter will look at the introduction part of the study, which includes the study’s history, statement of problem, aim and objectives, research questions, research hypothesis, research technique, study importance, study constraints, and study organisation.
Chapter two will provide a review of pertinent literature. Chapter three will concentrate on structural analysis. Chapter four will look at data analysis, presentation, and interpretation of the results conclusions. Chapter five will cover the summary, findings, recommendations, and conclusion, followed by references.
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