IMPACT OF MONETARY POLICY ON INVESTMENT IN NIGERIAN ECONOMY.
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IMPACT OF MONETARY POLICY ON INVESTMENT IN NIGERIAN ECONOMY.
Chapter one
INTRODUCTION
1.0 Background of the Study
Financial instability presents a new challenge to monetary policy. The majority of studies show that typical financial crisis patterns include extended unwinding of investments. These occurrences present a challenge to modern monetary policy.
Monetary policy is the process by which a country’s government, central bank, or monetary authority controls (i) the supply of money, (ii) the availability of money, and (iii) the cost of money or interest rate in order to achieve a set of goals aimed at promoting economic growth and stability. Monetary theory explains how to develop optimal monetary policy.
Monetary policy is classified as either expanding or contracting. A contractionary policy reduces the overall money supply in an economy, whereas an expansionary policy increases it.
Expansionary policy is generally used to battle unemployment during a recession by decreasing interest rates, whereas contractionary policy entails raising interest rates to combat inflation. Monetary policy contrasts with fiscal policy, which refers to government borrowing, spending, and taxing.
Monetary policy is based on the link between an economy’s interest rates, or the cost of borrowing money, and the overall supply of money. Monetary policy employs a range of techniques to influence one or both of these outcomes, such as economic growth (investment), exchange rates with other currencies, and employment.
Where currency is subject to a monopoly of issuance, or where there is a regulated system of issuing currency through banks linked to a central bank, the system authority has the capacity to change the money supply and hence affect interest rates (in order to achieve policy goals). Monetary policy as we know it now dates back to the late nineteenth century, when it was utilised to maintain the gold standard.
A contractionary policy is defined as one that reduces the size of the money supply or raises interest rates. An expansionary policy raises the money supply or lowers interest rates.
Additionally, monetary policies are described as follows:accommodating, if the interest rate set by the monetary authority is “intended to create economic growth.” Neutral if it is not meant to foster economic development or combat inflation: If the goal is to reduce inflation, keep the policy tight.
There are numerous monetary policy tools available to achieve these goals, including raising interest rates, lowering the monetary base, and increasing reserve requirements.
All have the effect of limiting the money supply and, if reserved, expanding it. Since the 1970s, the BRETTON WOODS approach has ensured that most governments develop the two strategies separately.
Almost all modern nations have special institutions (such as the Bank of England, the European Central Bank, the Federal Reserve in the United States, the Reserve Bank of India, the Bank of Japan, or the Bank of Canada) that are in charge of carrying out monetary policy, often independently of the executive.
In general, these institutions are known as central banks, and they frequently have larger responsibilities, such as overseeing the entire operation of the financial system.
Open market operations are the major tool used in monetary policy. This comprises regulating the amount of money in circulation by purchasing and selling various credit instruments, foreign currencies, and commodities. All of these purchases and trades result in more or less base currency entering or exiting market circulation.
Typically, the short-term purpose of open market operations is to attain a specified short-term interest rate target; but, in other cases, monetary policy may involve targeting a specific exchange rate relative to some foreign currency or gold.
For example, the Federal Reserve in the United States targets the federal fund rate, which is the rate at which member banks lend to one another overnight. In contrast, China’s monetary policy focuses on the exchange rate between the Chinese Renminbi and a basket of foreign currencies.
The other basic methods of implementing monetary policy are:
(i) Discount window financing (Lender of Last Resort)
(ii) Fractional deposit lending (changes in reserve requirements)
(iii) Moral suasion (convincing certain market players to accomplish specific objectives).
(iv) “Open mouth operation” (discussing monetary policy with the market).
1.1 Statement of the Problem
The issues confronting the Nigerian economy today include rising unemployment, a high level/rate of inflation, over-reliance on the oil sector, specifically oil exports, and a poor pace of growth and development in real output.
Other issues may include insufficient policies, unstable pressures on the balance of payment (BOP), persistent weakness of the naira’s value in the foreign exchange market (Forex), and high/interest rates due to inflationary expectations and imperfections in financial markets (both money and capital markets).
Finally, the uneven income distribution has had a significant impact on the fall in output and people’s living standards. However, it is clear that, notwithstanding the implementation of monetary policy measures, the situation appears to be unaffected.
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