THE PERFORMANCE OF MONETARY POLICY IN THE NIGERIAN ECONOMY (1980-2010)

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TABLE OF CONTENT
Certification ———————————————————————— i
Acknowledgement —————————————————————-ii
Dedication ————————————————————————–iii
Abstract —————————————————————————–iv
CHAPTER ONE
1.1 Introduction —————————————————————-1
1.2 Background of the study ————————————————-1
1.3 Statement of the problem ———————————————–7
1.4 Objectives of the study —————————————————8
1.5 Statement of hypothesis ————————————————-9
1.6 Scope and limitations of the study ————————————-9
1.7 Significance of the study ————————————————-9
CHAPTER TWO
2.0 Literature review ————————————————————11
2.0.1 Conceptual definition of monetary policy —————————–11
2.0.2 Evolution of the monetary policy framework in Nigeria ————12
2.0.3 Review of the monetary policy before the Structural
Adjustment Programme (SAP) ————————————————–16
2.1 Theoretical literature review ———————————————19
2.1.1 Monetary policy under the Structural Adjustment
Programme (SAP) —————————————————————–19
2.1.2 Nigeria monetary policy experience ————————————-23
2.2 Empirical literature review ———————————————–28
2.2.1. Framework of monetary policy in targeting inflation —————28
2. 2.2 An appraisal of the performance of monetary policy in Nigeria –30
2.2.3 Suggestion for dealing with inflation in Nigeria ———————–33
CHAPTER THREE
3.0 Research methodology ——————————————————-37
3.1 Model specification ———————————————————–37
3.2 Method of evaluation ——————————————————–39
3.2.1Unit root test —————————————————————–39
3.2.2Presentation of co-integration and error corrections —————-40
3.2.3 Diagnostic tests ————————————————————–40
3.3 Justification of the model —————————————————-40
3.4 Research approach ———————————————————–41
CHAPTER FOUR
4.0 Presentation of data and discussion of results ————————–42
4.1 Presentation of data ———————————————————-42
4.1.1 Unit Root Test —————————————————————-42
4.1.2 Co-integration Test ———————————————————-45
4.2 Economic Opinion, Interpretation/Appriori Criteria ——————–48
4.3 Statistical Criteria of the Results ———————————————48
4.3.1 T-test —————————————————————————-48
4.3.2 F-test —————————————————————————-49
4.4 Economic Criteria —————————————————————50
4.4.1 Test for Autocorrelation —————————————————–50
4.4.2 Normality test ——————————————————————51
4.4.3 Test for multicollinearity —————————————————–52
CHAPTER FIVE
Summary ——————————————————————————-55
Conclusion ——————————————————————————58
Recommendations ——————————————————————–59
Bibliography —————————————————————————-61

ABSTRACT
The purpose of this project work is based on the relative performance of monetary policy in the Nigerian economy. This work discussed the meaning of monetary policy is as combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the expected value of economies activities. The study shows further, the aims and objectives of monetary policy which includes price stability, maintenance of balance of payment equilibrium, promotion of employment, tackling inflation, output growth and sustainable development. The literature review shed more light on conceptual and evolutionary framework of monetary policy in Nigeria, review of monetary policy before and offer the structural adjustment programme (SAP), and appraisal of the performance of monetary policy in Nigeria were thoroughly discussed. also appropriate measures for managing inflation in the economy were also suggested from the research instruments and techniques, if was observed that there are leakages in velocity of money through corrupt practices in the system and diabolic means of creating cash flow which causes inflation, multiplicity of unemployment and low output growth. The research work, also showed the interplay between the gross domestic product (GDP) and other monetary policy variables (real exchange rate, real interest rate, money supply and liquidity ratio), and their respective contribution to the economy. In conclusion this project suggests total means of curling corruption using the various law enforcements in the country.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, sustainable development. These objectives are necessary for the attainment of internal and external balance, and the promotion of long run economic growth. The importance of price stability derives from the harmful effect of price volatility which undermines the objectives. This is indeed a general consensus that domestic price fluctuations undermines the role of monetary values as a store of value, and frustrate investments and growth.
Ajayi and Ojo (1981) and fisher (1993), empirical states on inflation, growth and productivity have confirmed the long run inverse relationship between inflation and growth. When decomposed into its components, that is growth due to capital accumulation, productivity growth, and the growth rate of the labour force, the negative association between inflation and growth has been traced to the strong negative relationship between it and capital accumulation as well as productivity growth respectively. The importance of these empirical findings is that stable prices are essential for growth due to capital accumulation, productivity growth, and the growth rate of the labour force, the negative association between inflation and growth has been traced to the strong negative relationship between it and capital accumulation as well as productivity growth
respectively. The importance of these empirical findings is that stable prices are essential for growth. The success of monetary policy depends on the operating economic environment, the institutional framework adopted, and the implementation of monetary policy is the responsibility of the central bank of Nigeria (CBN). The mandates of the CBN as specified by the CBN Act of 1958 include;
 Issuance of legal tender currency.
 Maintaining external reserves to safeguard the international value of the currency.
 Promoting monetary stability and a sound financial system.
 Acting as banker and financial adviser to the federal government.
However, the current monetary policy framework focuses on the maintenance of price stability while the promotion of growth and employment are the secondary goals of monetary policy. The performance of monetary policy depends on some legal framework upon which it operates. The legal framework are quantitative general or indirect and second, qualitative selective or direct. The effect effects the level of aggregate demand through the supply of money, cost of money and availability of credit. Out of the two types of instruments, the first category include bank are variations, open market operation, and required reserve ratio. They are meant to regulate the overall level of credit in the economy through commercial banks. The selective credit control aims at controlling specific types of credit. This includes changing margin requirement and regulation of consumer’s credit (M.L Jhingan, 2003).
In any economy, the conducts of both policies are normally rooted through banking institutions that play in the intermediation process. The role of bringing lenders and borrowers together through this process the central bank plays a very important role in determining the price of money (Ebhodaghe, 1996). Therefore, monetary policy is important in its own right from the past view of monetary economists and policy maker’s interns of its impacts on the economy. Of all tools available to government for directing the cause of the economy, monetary policies have proven to be the most visible instrument for achieving medium term stabilization objectives (CBN guideline 2002). Indeed monetary policy formulation and implementation emerged as a critical government responsibility so that the economy does not go astray. Policies are made not only for their own sake rather for achieving some desired goals over a given period of time.
Generally, the primary objectives of monetary policy is concerned with the application of expansionary monetary policy measures during economic recession and contractionary monetary policy controls money supply because it is believed that its rate of growth has an effect on inflation. The basic aim of monetary policies is not to aggregate themselves but the aggregate in the real sectors of the economy such as, level of capital price stabilization and economic development. Policies are designed in order to change the trend of some monetary variables in particular direction so as to induce the desired behavioral change in the monetary policy. The central bank’s role is to conduct appropriate monetary policy that is consistent with the main economic objectives that will help the growth of gross domestic product (GDP), sustainable inflation are and stable balance of payment position. This is done by putting in place the direct or indirect monetary approach so as to control monetary trends. In this regards the CBN determines the amount
of money to be supplied that is consistent with the nation’s macro-economic objectives and manipulate the monetary instrument at its disposal in order to achieve the stated objectives. Monetary policy influences the macrocosmic objectives because it is believed that there occurs a relationship between the real variables. Monetary policy affects all aspects of our economic and financial decisions whether to buy a car, build a house, start up a business or to expand the existing ones, whether to send one’s child to school or to make the child learn trade. Money supply or monetary policy tries to influence the performance of the economy as reflected in key macro-economic indicators like inflation, GDP and employment. It works by affecting aggregate demand across the economy, that is, individuals’ and firms’ willingness and stability to spend on goods and services. In doing this, monetary policy has two fundamental goals to promote maximum sustainable output and employment and to maintain sustainable price level in the economy. The job of stabilizing output in the short run and promoting price stability in the long run involves several steps first, the central bank tries to estimate how the economy is doing now and how it is likely to do in the medium term, then, it compares this estimates to its goals for the output and the price level, if there is a gap between the estimates and the goals, the CBN have to decide on how forcefully and swiftly to act to close the gap. Estimate of the current economic conditions are not as even as the most up-to-date data on key variables like employment, growth, productivity etc, largely reflect condition in the past. So to get a reasonable estimate of the current and medium term economic conditions, the central bank tries to find out what the most relevant economic developments are such as government spending, economic conditions abroad, financial conditions at home and abroad and the use of new technologies