EFFECTIVENESS OF MONETARY POLICY IN STIMULATING ECONOMIC GROWTH IN NIGERIA.
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EFFECTIVENESS OF MONETARY POLICY IN STIMULATING ECONOMIC GROWTH IN NIGERIA.
Chapter one
INTRODUCTION
1.1 Background for the Study
Monetary policy, as an economic management strategy, seeks to promote long-term economic growth and development. This has been the quest of nations, as described by Onyewu (2012), on how money influences economic aggregates.
This viewpoint stretches back to Adam Smith and was later promoted by monetary economists. Since the expositions of the role of monetary policy in influencing macroeconomic objectives such as economic growth and development
which include employment generation, price stability, growth in Gross Domestic Product (GDP), balance of payments equilibrium, and a slew of others, monetary authorities have been saddled with the primary responsibility of using monetary policy to formulate and implement policies that aim to drive the economy on an even level.
Monetary policy is one of the macroeconomic tools that governments use to manage their economies. Monetary policy is regarded as an important component of macroeconomics, since it involves the use of monetary tools to regulate the value, supply, and cost of money in an economy in accordance with the projected level of economic activity (Ubi, Lionel, and Eyo, 2012).
It encompasses the full range of measures or combinations of packages designed to impact or manage the volume, pricing, and direction of money in the economy per unit of time.
Specifically, it pervades all of the monetary authorities’ debonair efforts to control the money supply and credit conditions in order to achieve various macroeconomic goals. Monetary policy formulation in Nigeria is the responsibility of the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF).
Nigeria’s monetary environment has been extremely volatile in recent years, making the economy sensitive to shocks from variable commodity prices. If the economy slows and employment falls, policymakers will be encouraged to ease monetary policy in order to stimulate aggregate demand.
When growth in aggregate demand exceeds growth in the economy’s capacity to create, slack is absorbed and employment returns to a more sustainable level.
In contrast, if the economy is overheating and inflation pressures are rising, the Central Bank will be inclined to counter these pressures by tightening monetary policy to bring aggregate demand growth below that of the economy’s capacity to produce for as long as necessary to defuse inflationary pressures and put the economy on a path to sustainable expansion (Anowor and Okorie, 2016).
While these policy choices appear reasonably straightforward, monetary policy makers routinely face certain notable uncertainties because the actual position of the economy and growth in aggregate demand at any point in time is only partially known as key information on variables only comes with lags, such that policy makers are constraint to rely on estimates of these economic variables when assessing the choice of appropriate policy and thus could act on the basis of Furthermore, monetary policy is not the main influence on output, employment, and pricing.
Many other factors influence aggregate demand and supply, and thus the economic positions of economic units. Some of these factors can be anticipated and factored into spending and other economic decisions
whereas others, such as shifts in consumer and business confidence, creditor posture, natural disasters, disruptions in the oil market that reduce supply, agricultural losses, and slowdowns in productivity growth, are completely unpredictable and have unanticipated consequences for the economy.
In Nigeria, as in other developing countries, monetary policy aims to achieve full employment, domestic price stability, adequate economic growth, and external sector stability. Monetary policy’s other aims include smoothing the business cycle, preventing financial crises, and stabilising long-term interest rates and the real exchange rate (Mishra and Pradhan, 2008).
In pursuing these goals, the CBN recognises that there will be conflicts between them, necessitating trade-offs at times (Uchendu, 2010).
The Bank manipulates the operational target (monetary policy rate, MPR), over which it has significant direct control, to influence the intermediate target (wide money supply, M2), which in turn affects the ultimate goal of price stability and long-term economic growth. Hence, this study tries to analyse the effectiveness of monetary policy in boosting economic growth in Nigeria.
1.2 Statement of Problem
Price stability is one of Nigeria’s main monetary policy objectives. Despite the many monetary regimes introduced by Nigeria’s Central Bank throughout the years, inflation and unemployment continue to pose significant challenges to the country’s economic progress.
In this vein, Greenspan (2003) observed succinctly that “uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.” Within the Nigerian monetary environment, data “robustness,” data transmission mechanisms, and fiscal environment are notably found to be her greatest challenge and uncertainty.
This is especially significant because the Nigerian external sector (balance of payment) through changes in net foreign assets and the government budget (net credit to government) influence monetary policies as much as the real growth of the economy and prices.
Furthermore, Okorie (2009) observed that monetary data as a component of monetary policy proposals are frequently subject to frequent revision, as are non-availability and quality concerns about non-monetary data such as real sector statistics, which act as a drag on monetary policies while also having a significant impact on Nigerian economic growth.
Fiscal surprises have been shown to significantly impair monetary policy, for example, in the event of fiscal tax.
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