MONETARY POLICY AS A TOOL OF GOVERNMENT INTERVENTION IN THE STABILIZATION OF PRICE OF THE ECONOMY.
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MONETARY POLICY AS A TOOL OF GOVERNMENT INTERVENTION IN THE STABILIZATION OF PRICE OF THE ECONOMY.
Chapter one
1.0 Introduction
According to the Stallion, a quarterly publication by Union Bank of Nigeria Plc (anniversary issue 1998).The earliest support for the founding of Nigeria’s central bank dates back to the banking failures of the early 1950s, after which the financial secretary gained control of banking.
Many Nationalist leaders at the time advocated for the establishment of a central bank to perform these and other customary functions, which include the following:
1. Float, purchase, and sell government bonds and securities.
2. To operate as a lender of idle resources to banks, for which the bank would also hold reserves.
3. Act as the government’s financial agent.
4. Serves as a monetary authority to promote pricing and economic stability.
5. To begin money production.
However, the ordinance establishing the Central Bank of Nigeria (CBN) was passed by the House of Assembly on March 17, 1958, and was partially implemented on September 15, when the penalties required to carry out the initial role became law.
The Act was completely implemented on July 1, 1959, when the Central Bank of Nigeria went into full operation. The following are the key provisions of the Central Bank Act.
a) Bankers to other Nigerian banks.
b) Banks and financial advisers to the federal government.
b) Maintaining foreign reserves to protect the international worth of currency.
d) Implementing monetary policies that support monetary stability and a strong financial system.
e) Issue of legal tender currency in Nigeria.
1.1 Background to the Study.
As stated explicitly in the above-mentioned Bank Act, one of the primary purposes of the Central Bank is to promote monetary stability and soundness in the financial system by implementing monetary policies.
Thus, monetary policy may be defined as a set of measures aimed to regulate the value, supply, and cost of money in an economy in accordance with the amount of economic activity.
Monetary policy employs two key strategies to attain its aims. These are the direct portfolio control approach and the indirect market intervention strategy.
The direct control strategy was adopted in the early 1960s, whereas the use of indirect control began in the early 1960s, namely in 1993, with the launch of open market operations (OMO).
According to Scitouslky (1969), money is a difficult notion to describe, in part because it serves three functions: a unit of account, a medium of exchange, and a store of value.
As a result, he defines money as a commodity used for valuation and payment, with Le serving as both the unit of account and the generally accepted medium of exchange. Thus, in addition to legality, several factors influence whether a thing can be used as money.
Money is unique among economic items, and the principle of broad acceptability distinguishes it from other commodities in today’s market.
The advent of money in assessing the worth of products and services alleviated the challenges of bartering and made trading more easier. During the barter period, the value of a product varies depending on who is providing it to the person in need. Today, value is placed on objects that merely require a monetary exchange.
According to Adewunmi (1996), price is the value associated with a specific commodity. A commodity’s value is determined by the quantity of money that can be exchanged for it. In other words, the prices of various goods reflect their monetary values.
The pricing of products and services so provide an indirect indication of the value of money. Assume a given quantity of item costs $8.00 at one era and $10.00 at another; the difference in pricing between the two latter periods indicates that the value of money is declining.
The general price level serves as a measure of the value of money. A widespread decline in commodity prices suggests an increase in the value of money, whereas a general rise in prices indicates a drop in the value of money.
A persistent change in price level is a sign of an unstable economy. As a result, an unstable economy is one characterised by widespread inflation. One of the effects of economic inflation is monetary breakdown, which occurs when money loses its value rapidly.
This type of situation causes money to cease to function as a standard for various payments and to serve as a store of value. There is thus a need for a tool to stabilise the value of money.
To maintain the value of money stable, the quantity must be managed.
Monetary policy is an instrument used to control the amount of money in the economy.
According to Erizing (1972), monetary policies are all decisions and measures taken to influence the value of the price or amount of money, regardless of whether their goals or purposes are monetary or non-monetary and attempt to effect the monetary system. This includes non-monetary policy measures.
The concept, however, is too broad to accurately describe the scope of monetary policy. Johnson provides a more explicit definition: “Monetary policy is the policy used by the Central Bank to control the supply and cost of money as a tool for achieving the goals of general economic policy.”
Edward Scinpio provided a more precise definition of monetary policy as the exercise of Central Bank control over the money supply in order to achieve price stability, rapid growth, full employment, and balance of payments equilibrium.
From the above definitions, one can see that monetary policy is mainly concerned with deciding how much money the economy shall have, or perhaps more correctly, deciding whether to increase or decrease the volume of purchasing power in the country.
If the quantity of money is deemed insufficient to keep up demand to a level that will give full employment, an inflationary policy will be adopted, that is, steps will be taken to increase the quantity of money.
Monetary policy is developed and implemented through monetary actions. Nigeria’s monetary authorities include the presidency, the Central Bank of Nigeria, and the Federal Ministry of Finance.
The Federal Ministry of Finance administers Nigeria’s Central Bank. The Central Bank of Nigeria is the agency principally in charge of developing monetary policy proposals for presidential approval and ensuring the implementation of monetary policy measures approved by the Federal Government. This is the Central Bank of Nigeria’s most important activity.
1.2 Statement of Problems
The problem in this study is to establish how monetary policy instruments can be utilised to stabilise the economy’s price levels. This is because, over the years, there has been an upward and downward swing in prices in the economy, which has greatly contributed to economic fluctuation and instability.
As a result, the problem statement is to evaluate price stability in the economy using various monetary policy instruments such as OMO (Open Market Operations), bank rates, reserve ratios, credit selection, and bank recapitalization, among others.
1.3 OBJECTIVE OF STUDY
The primary goal of this study on monetary policy as price stabilisation instruments is:
a) Identify the primary challenges of efficiently implementing monetary policy.
b) To determine the effects of monetary policy on the pricing of goods and services in Nigeria, as well as how they influence the rate of inflation.
c) To examine the evolution or establishment of power in the Nigerian central bank’s monetary policy.
d) Identify the basic monetary policies of Nigeria.
e) Identify how monetary policy is developed, implemented, or executed by monetary authorities.
1.4 Research Questions and Hypotheses
1. What is the challenge with implementing monetary policy efficiently?
2. How do monetary policies affect the prices of goods and services in Nigeria?
3. How effective is the Central Bank of Nigeria’s implementation of monetary policies?
4. Identify the fundamental monetary policies of Nigeria.
5. Why do monetary authorities formulate and administer monetary policy?
Formulation of Hypothesis
Hypothesis I
H0: Annual monetary policy guidelines are used to stabilise the overall price of commodities.
H1: The yearly monetary policy guidelines do not stabilise commodity prices.
Hypothesis 2.
H0: The money supply affects the rate of inflation in Nigeria.
H1: The money supply has no effect on the rate of inflation in Nigeria.
1.5 Scope of Study
The scope of this study is to investigate the effect of monetary policy on the overall price level of commodities in the economy. To achieve the goal of this research, the researcher will examine various monetary policies in the banking sector, specifically Union Bank of Nigeria P1c.
According to the Central Bank of Nigeria’s monetary policy guidelines.
1.6 Significance of the Study
The study will explain the exploitation and rationale for monetary policy in price stability. And will make recommendations to avoid or mitigate financial distress caused by multiple constructions of the money supply. This study will explain how the bank’s solvency was determined. Also, reveal the link between the money supply and price.
1.7 Definition of Terms
Some terms will be used often during the authoring of this project. The terms are:
a. Treasury Certificate: This is a money market product that is used to borrow for a term of 12 to 26 months.
b. Stabilisation Securities: These are issued to banks and commercial banks to generate funds through lending activities.
c. Monetary Policies: These are employed as a stabilisation tool to control fluctuations in economic activity.
1.8 Background Information for the Case Study
The Central Bank of Nigeria was partially created on March 17, 1958, and partially operationalized on September 15, 1958, when the parts required to carry out the beginning tasks became legislation.
The Act was completely implemented on July 1, 1959, when the Central Bank of Nigeria went into full operation. The following are the key provision of the Central Bank Act:
1. Financial advisor to the Federal Government.
2. Bankers to other banks in Nigeria.
3. Implementation of monetary measures to promote monetary stability and sound structure.
4. Issuance of legal tender currency in Nigeria.
5. Maintaining foreign reserves.
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