MONETARY POLICY MEASURE AS AN INSTRUMENT OF ECONOMIC STABILIZATION
ABSTRACT
This paper enables the researcher to examine monetary policy measure as an instrument of economic stabilization. In doing this, the Ordinary Least Squares Method (OLS) is used to analyze data between 1981 to 2011.
An overview of the results of the Ordinary Least Squares (OLS) Estimation Method, presented above is an indication that the value of the coefficient of determination (R2) stood at 0.95. This is an indication that about 95per cent of the total systematic variation in the dependent variable (GDP) has been explained by the explanatory variables. This means that only about 5 per cent of the total systematic variables is left unexplained, hence, captured by the stochastic error term in the model. The result of the analysis shows that monetary policy presented by money supply exerts a positive impact on GDP growth. For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, and sustainable development. These objectives are necessary for the attainment of internal and external balance, and the promotion of long-run economic growth. Evidence in the Nigerian economic growth or economic activity. Over the years, Nigeria has been controlling her economy through variation in her stock of money. Consequent upon the effect of the collapse of oil price in 1981 and the B.O.P deficit experienced during this period, various methods of stabilization ranging from fiscal to monetary policies were used.
Also, the core finding of this study shows that inflation rate, exchange rate and external reserve are significant monetary policy instruments that drive growth in Nigeria. It is therefore recommended that the establishment of primary and secondary government bond markets that can also increase the efficiency of monetary policy and reduce the government’s need to rely on the central bank for direct financing. The recommendations are that monetary policy should facilitate a favourable investment climate through appropriate interest rates, exchange rate and liquidity management mechanism and the money market should provide more financial instruments that   satisfy the requirement of the ever-growing sophistication of operators. It also helps the researcher with some knowledge on how to use the monetary instruments to control and regulate the circulation of funds in a country.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1        Background of Study           
1.2        Statement of the Problem     
1.3        Objectives of the Study  
1.4        Significance of the Study      
1.5        Scope of the Study       
1.6        Research Hypothesis            
1.7        Research Methodology       
1.8        Limitation of the Study
1.9        Definition of Terms      
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction          
2.2 Instruments of Monetary Policy        
2.2.1 Open Market Operation
2.2.2 Discount Rate     
2.2.3 Moral Suasion             
2.2.4 Liquidity Ratio             
2.2.5 Special Deposit   
2.2.6 Credit Guidelines or Selective Credit Controls           
2.3 General Quantitative Control         
2.4 Selective/Qualitative Credit Control   
2.5 Theoretical Framework and Literature Review     
2.6 Monetary Policy Mechanism     
2.7 Nigeria Experience         
2.8 Phase of Monetary Policy in Nigeria before 1986
2.9 Phase of Monetary Policy in Nigeria since 1986           
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Research Methods and Procedures
3.1 Model Specification
3.2 Research Design            
3.3 The Type of Data and Sources of Data              
3.4 Instruments of Data Collection
3.5 Actual Field Work   
3.6 Method of Data Presentation    
3.7 Method of Data Analysis
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction
4.2 Presentation of Results            
4.3 Interpretation of Results     
CHAPTER FIVE:           SUMMARY, FINDINGS, CONCLUSION, AND RECOMMENDATIONS
5.1 Summary  
5.2 Findings                
5.3 Recommendations    
5.3 Conclusion    
References                  
Appendix                                                        
CHAPTER ONE
INTRODUCTION
1.1       BACKGROUND OF THE STUDY
Monetary policy as a technique of economic management to bring about Sustainable economic growth and development has been the pursuit of nations and formal articulation of how money affects economic aggregates. Since its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to play the traditional role expected of a central bank, which is the regulation of the stock of money in such a way as to promote the social welfare. This role is anchored on the use of monetary policy that is usually targeted towards the achievement of full-employment equilibrium, rapid economic growth, price stability, and external balance. Over the years, the major goals of monetary policy have often been the two later objectives. Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus based on assumption that these are essential tools of achieving macroeconomic stability (Ajayi, 1999). Dates back the time of Adams Smith and later championed by the monetary economists. Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth, price stability, equilibrium in balance of payments and host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to grow their economies. Tradable economic activities are "special" in developing countries. These activities suffer disproportionately from the institutional and market failures that keep countries poor. Sustained real exchange rate depreciations increase the relative profitability of investing in tradable, and act in second-best fashion to alleviate the economic cost of these distortions. That is why episodes of undervaluation are strongly associated with higher economic growth. There exist a unique long-run relationship between interest rates and economic growth. Thus, interest rate is an important determinant of economic growth in Nigeria. However, the deregulation of interest rates in Nigeria may not optimally achieve its goals, if those other factors which negatively effects investment in the country, as suggested by Guseh and Oritsejafor (2007), are not tackled. The main thrust of this study is to evaluate the effectiveness of the CBN’s monetary policy over the years. This would go a long way in assessing the extent to which the monetary policies have impacted on the growth process of Nigeria using the major objectives of monetary policy as yardstick. The remainder of the paper is organized as follows. Section two deals with the literature review. In Section three, the methodological framework of the study is pursued while the empirical results are discussed in section four. Section five concludes the paper. In Nigeria, monetary policy has been used since the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central bank Act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. There have been various regimes of monetary policy in Nigeria some times, monetary policy is tight and at other times it is loose mostly used to stabilize prices. The economy has also witnessed times of expansion and contraction but evidently, the reported growth has not been a sustainable one as there is evidence of growing poverty among the populace. The question is, could the period of growth be attributed to appropriate monetary policy? And could the periods of economy down turn to be blamed on factors other than monetary policy effectiveness? What are the measures to be considered if monetary policy would be effective in bringing about sustainable economic growth and development?
These are the questions this study would attempt in this study. The objectives of this study therefore, are to access the impact of monetary policy in Nigeria, specially, if it has facilitated growth or not to examine the effect of other co-operant factors in bringing about the desired sustainable economic development in Nigeria.
1.2    STATEMENT OF THE PROBLEM
Despite the various monetary regimes that have been adopted by the central bank of Nigeria over the years, inflation still remains the major threat on Nigeria economy growth.
The growth of money supply is correlated with high Inflation episodes because money was often in excess of real economy growth.
However, some problems facing economy growth includes; supply shocks, currency devaluation an changes in terms of trade.
Structural factors have proven to be important in inflation spiral, reduction in real income, with serious distributional implications. These makes the economy witness times of expansion and contraction but evidently, the reported growth has not been a sustainable one has there is evidence of growing poverty among the populace.
Therefore, the main thrust of this study is to evaluate the efficacy of the CBN’S monetary policy over the years, this would go a long way in accessing to the extent to which monetary policy has impacted on the economy growth process using the major objectives of the monetary policy as yardstick.
1.3    OBJECTIVES OF THE STUDY
The objective of this study therefore, is to assess monetary policy measure as an instrument of economic stabilization, specifically, if it has facilitate growth or not and examine the effect of other co-operant factors in bringing about the desired sustainable economic development in Nigeria.
From the above definition and meaning of monetary policy, one can quickly draw up the distinctive objectives;
•To comprehend the monetization of exchange and its relation to the technologies of production and exchange.
•To appreciate the form that money takes and, especially, the viability of fiat money.
•To determine the significance of the real values of units of money.
•To know the relation between the nominal quantity of money and aggregate economy activities.
•To understand the entire functioning of the economy, essentially issues of cause an effect as they relate to flow and stock of money.
 1.4       SIGNIFICANCE OF THE STUDY
Most African scholars and policy makers increasingly subscribe to a view of central banking. The view priories the objectives of monetary policy which more than either theoretical orxothody or the African banks themselves in the 1960s and 1970s. The time consistency literature, in particular argues that central banks that fails to specialize in monetary stability, making low inflation a clearly overriding priority as against output stabilization, fiscal support to government etc.
The level of statistical significance chosen is at 5% level of significance showing if there is existing linear and proportionate relationship between GDP and the explanatory variables.
1.5     SCOPE OF THE STUDY
The economy is the largest component with lots of diverse and sometimes complex parts. This study will only focus on major growth components such as the gross domestic product, but shall empirically investigate on the impact of the monetary policy on economy growth of Nigeria and will be restricted to the period between 1981 - 2011.
1.6       RESEARCH HYPOTHESIS
The hypotheses to be tested in the course of this research work are;
1.           Null hypothesis (H0): That there is existing linear and proportionate relationship between GDP and the explanatory variables (liquidity ratio, money supply and cash ratio).
2.           Alternative hypothesis (H1): That there is no existing linear and proportionate relationship between GDP and the explanatory variables (liquidity ratio, money supply and cash ratio).
1.7       RESEARCH METHODOLOGY
        The ordinary least square method (OLS) shall be employed in obtaining the numerical estimates of the coefficient in different equations. The OLS method is chosen because it possess some optimal properties; its computational procedure is fairly simple and it is also an essential component of most other estimation techniques. The estimation period covers the period between 1981-2011in demonstrating the application of ordinary least square method, the multiple linear regression analysis will be used with Gross Domestic Product which strictly focuses on economy growth as the dependent variable while liquidity ratio, cash ratio, money supply as the explanatory variables.
The method would be applied with the use of statistical package for social science (SPSS).
The data for this study shall be obtained mainly from secondary sources, particularly from central bank of Nigeria (CBN) publications. This study makes use of econometric analysis in estimating the relationship between selected monetary policy components and major growth components.
1.8       DEFINITION OF TERMS
•Monetary policy: This can be defined as the control of money supply and credit, thereby regulating the cost credit (interest rate) in a manner that will affect aggregate demand in a direction that will contribute to the achievement of macro-economic objectives which are; economic growth, price stability, and full employment.
•Inflation rate: This is a high and persistence increase in the general price level of goods and services.
•Gross domestic product: This refers to the total value of all goods and services produced within one year calculated in market price.
•Balance of payment: This is the summary of all records of economic and financial transactions in a country within a specific period of time usually a year.
•Employment: This refers to the number of persons in the labor force currently holding a job.
•Money supply: This refers to the sum total of money stock quantified in their facial value. It is also said to be the amount of money supply which is measured in monetary units.
•Liquidity ratio: This refers to reserve requirement, a bank regulation that seeks the minimum reserve each bank