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PROJECT TOPIC : ROLE OF MONETARY POLICY IN PROMOTING ECONOMIC STABILITY IN NIGERIA

PROJECT TOPIC : ROLE OF MONETARY POLICY IN PROMOTING ECONOMIC STABILITY IN NIGERIA.

 

ABSTRACT

In the late 1970s to the middle of 1980s there exist some major macro economic problems in the economy of Nigeria. Some of these problems includes; exchange rate, unfavourable balance of payment and others. Government therefore in an attempt to control the severity of these problems made use of monetary policy to reduce the effect of these macro economic problems, which can endanger the growth of the economy.

This project work therefore focuses on finding the causes of these macro economic problems, examine the role of monetary authorities in an attempt to reduce the effect of these problems through monetary policy implementation.

Against this back ground, data for the regression analysis were collected from various secondary sources. The method of analysis include the use of ordinary least square and other statistical tests.

The finding shows that monetary policy plays a significant role in promoting economic stability in the economy of Nigeria.

Government in an attempt to stabilize the economy should therefore make use of effective monetary policies.

CHAPTER ONE

INTRODUCTION

  • BACKGROUD TO THE STUDY

Rapid and sustainable economic growth remains the quest of every society. The Nigeria economy experienced serious economic problems from late 1970’s to mid 1980’s the country’s balance of payments came under severe pressure and was in persistent deficit during the period.

The government current expenditure expanded without appreciable increase in revenue leading to widening fiscal deficit, which were largely financed with bank credit with averse effects on the general price level.

The responsibility for monetary policy and implementation in Nigeria rest with the Central Bank of Nigeria [CBN]. Monetary policy in Nigeria has been conducted under wide ranging economic environments. The monetary and financial policies pursued in recent years have been designed to support the attainment of basic objective of the economic reform programme adopted in July 1986 to restore macro economic stability in the short term and induce the resumption of sustainable growth. This represents a strategic land mark in the history of economic stabilization as it marked the end of highly regulated regime and opened up a new chapter that reflected government efforts at deregulating the economy with increased emphasis on market forces.

The instruments available to the CBN during this period for the achievements of objective of monetary policy include both the direct and indirect instruments, which have been used in various degrees and at different stages of the country’s experiments with monetary policy.

The responsibility of any government in a country in its monetary policy consists of actions by the CBN with its monetary management and to ensure a stable internal and external value for the national currency.  In this regard, it is important that the supply of money and credit to an economy is adequate to support desirable and sustainable growth without causing inflationary pressures and undue instability in the exchange rate, the ultimate objective being the improvement in the welfare of the citizenry.

The term money for the purpose of this study is a means of payment for goods and services. The dynamic functions of money have some international dimensions, as there is the technical device for financing transfer of capital. The value of money depends on the confidence people have on it, that they exchange it for sale of goods and services whenever they want to do so.

To keep the value of money stable, its quality has to be controlled for money to perform its useful roles of store of value, standard for deferred payments, units of accounts and medium of exchange efficiently and effectively. It requires a skillful and careful management in order to ensure relative price stability, so as to motivate the financial sector and promote economic development in a changing world of complex economic and finance relations.

PROJECT TOPIC : ROLE OF MONETARY POLICY IN PROMOTING ECONOMIC STABILITY IN NIGERIA.

Monetary policy is a major economic stabilization weapon, which involves measures designed to regulate and control the volume, cost and direction of money and credits in the economy to achieve objectives, which can change from time depending on the economic fortune of a particular country.

Monetary policy formulation and its implementation has raised a very difficult task as well as practical problem in Nigerian economy.

Generally, the objectives of monetary policy was designed to deal with the following:

  1. High rate of employment
  2. Maintenance of relative price stability
  • Control of inflation
  1. Iv sustainable rate of economic growth.
  2. Maintenances of healthy balance of payments position for the country in order to uphold the external value of the national currency.
  3. The enhancement of rapid economic development.
  • Maintenance of relative stability of domestic prices, in practice one finds more often than not, in objectives conflict intractably. Hence, monetary management involves difficult trade offs among conflicting objectives in order to maximize the overall benefits to the society.

In the process of monetary management policy formulations, it is of utmost importance to specify the focus of policy; otherwise, it will be impossible to evaluate performance. For example the objective of price stability and in the short-run, which may not be sustainable in the long-run.

Monetary expansion may raise output of goods and services and level of employment and consequently lead to price stability in the long-run.

Standard tools have been devised to facilitate monetary management, but the major constraints it have is that, the tools are not universally applicable, there is a strong need for selection depending on each country’s’ problems or circumstances and stages of development and conditions suitable to the use of the instruments selected.

The ability of putting the economy in permanent state of excess demand as long as aggregate supply of goods and services do not move as rapidly as the aggregate demand due to supply inelasticities, irrelevant rules and related rigidities in the structural problems in developing countries include high dependency on imported goods, differences in productivity among sectors and the general rigidities in prices and wages.

Structuralism came into conclusion in order to promote economic growth and development. That is to say that with out some measure of inflation, growth and development were unlikely to occur and be sustained.

In Nigeria, the CBN wielded the primary responsibilities of initiating, implanting, articulating and appraising a monetary policy. The result level of macro economic instability in Nigeria is as a result of the sustained  pursuit of expansionary fiscal and monetary output. There have been some record of success and failure in the conduct of monetary policies.

The role of these policies are shown by empirical result of their performances. A good examination of monetary result will be attain if independence is being granted to the people concern in the implementation of such policies.

In light of the prevailing economic situation, the government must decide the priority attached to any of these policies, so that one can categorically come to conclusion that all hope is not lost for Nigeria economy to recover from recession.

1.2   STATEMENT OF RESEARCH PROBLEM

The goals of every economy remains the same irrespective of the state of the economy (developing or developed) that is price stability and rapid and sustainable economic growth rate etc.

There is no economy that is totally protected from economic problems like high unemployment rate, balance of payment disequilibrium, inflation unsustainable growth rate, increase in printing of fake currency etc.  The desire of economists to reduce the occurrence of these ills has led them to harness resources and efforts in developing appropriate policies to tackle these problems.

Monetary policy is one of such policies used by government to achieve laudable macro economic variables in engulfing these macro economic problems.

1.3   OBJECTIVES OF THE STUDY

The objectives of this study is as itemized below:

  • To trace the causes of macro-economic instabilities in Nigeria.
  • To show the role of monetary policy adopted by CBN to resort macro-economic stability.
  • To pinpoint the major causes of price instability and also point out remedies.
  • To enhance future policy formulation and implementation in Nigeria.
  • Finally, to detect and recommend ways by which the economic situation of Nigeria can be improved by the achievement of other  objectives above.

1.4   SIGNIFICANCE OF THE STUDY

The finding will show that money supply plays in the economy of Nigeria.

Secondly, the result or findings will assist the monetary authorities to determine whether to continue with the existing measures to initiate a review of the policy (either to change direction or to fine tune the existing  policy) geared towards providing a sound and stable financial environment that is conducive for the attainment of both macro-economic stability and growth.

Lastly, the result of the study will assist government in an attempt to stabilize the economy to make use of effective and efficient monetary policies.

1.5   HYPOTHESIS OF THE STUDY

The hypothesis of the study is as stated below:

H0: b1 = 0  Null hypothesis

H1: b1 ≠ 0  Alternative hypothesis.

H0: b1 = 0: Monetary policy has no significant role to policy in

promoting economic stability.

H0: b1 ≠ 0:   Monetary policy has a significant role to play in

promoting economic stability

1.6   SCOPE OF THE STUDY

This study covered the period between 1986 and 2004.

1.7   LIMITATION OF THE STUDY

The researcher encountered the following constraints in the process of the study:

(1) TIME CONSTRAINT: A study of this nature requires more time than that which was given to the researcher; but this was not available because of academic pressure and other programmes.

(2) ACADEMIC PROGRAMME AT THE TIME OF STUDY: The study was carried out by a student researcher, and base on this, at the time of this study there were a lot of disruptions more than what have been ever experienced by the researcher. As a result, the researcher never stayed  at a place while writing. The motivating factors and joy that guides a researcher were not there hence the time for research and academic works could not be properly scheduled.

(3) FINANCIAL CONTRAINT: The financial strength of the researcher as at this same period was a set back as it made things a little more difficult as finance was inadequate for traveling in the gathering of data.

1.8   DEFINITION OF TERMS

MONETARY POLICY: Monetary policy involves measure designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macro-economic policy objectives.

MONETARY BASE: The monetary base is the sum of the cash reserves of the banking sectors held on deposit with the central bank and the currency in circulation outside the banking system.

MONETARY TRANSMISSION MECHANISM (MTM):

This shows how a change in a monetary instrument is transmitted to changes in the policy variables.

PROJECT TOPIC : ROLE OF MONETARY POLICY IN PROMOTING ECONOMIC STABILITY IN NIGERIA.

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