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MONETARY
POLICY AND
MICRO
ECONOMIC
INSTABILITY IN
NIGERIA
1
BY
EMMANUEL NELSON BASSEY
COLLEGE OF ACCOUNTANCY AND COMPUTER TECHNOLOGY
BLOCK B, FLAT 8, MASOJE ESTATE, PTI ROAD,
DELTA STATE. NIGERIA.
A RESEARCH PROJECT WRITTEN IN THE DEPARTMENT
OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS
STUDIES.
SUBMITTED
IN PARTIAL FULFILMENT FOR THE AWARD OF HIGHER
NATIONAL DIPLOMA (HND) IN BUSINESS
ADMINISTRATION.
NOVEMBER 2009
APPROVAL
2
We the undersigned hereby certify that this project was
carried out by ....................................... in the department of
business administration, school of business studies. We also
certify that the work is adequate in scope and quality in partial
fulfilment for the award of Higher National Diploma (HND) in
business administration. .
DateProject Supervisor
Center co-ordinator Date
DEDICATION
This project work is dedicated to the Almighty God who gives
wisdom for academic excellent, and to my beloved husband
and my kids who did not deprive me from benefiting and
having the light of education.
3
ACKNOWLEDGMENT
I am most grateful to the Almighty God for giving me life,
strength and courage to sail through my educational career
despite all odds and obstacles.
4
In writing this project, I am indebted to my people for their
contributions; support and encouragement in making this
project work a success.
I will like to use this opportunity to express my sincere thanks
to my parents, brothers and sisters, relatives, friends and
loved ones for their prayers, moral and financial support
through this program.
My profound gratitude goes to my Supervisor Mr Emmanuel N.
Bassey who despite his crowded schedule, sacrificed time to
read through the manuscript without which this project would
not have seen the light of the day.
My special thanks also goes to center co-ordinator, Mrs
Ogbinaka, the registrar, Mrs Stella Oyabugbe, Mr and Mrs Liya,
Mr and Mrs Nwankolobia, Rev. and Anusem, anti Esther, anti
Muareen, bro Paul, Mr Mrs Elvis Abanum,Mrs Ajayi, Miss Mercy
for their advice, encouragement and assistance.
In like manner, I wish to acknowledge the effort of all my
lecturers in business admin. department for their principal
knowledge imparted on me during my period of study.
With special thanks to my beloved husband and kids for their
endless love shown to me during the course of my studies.
5
Finally, thanks to others I cannot remember during the course
of the write up, may God reward every effort of kindness and
love shown during my academic pursuit.
ABSTRACT
Generally, both fiscal and monetary policies seek at achieving relative
macroeconomic stability. Based on countries' experience on the role of
monetary policy in controlling economics instability, this study examines
the efficacy of monetary policy in controlling inflation rate and exchange
rate instability. The analysis performed is based on a rational
expectation framework that incorporates the fiscal role of exchange
rate.
6
In this research work, the researcher is focusing on monetary
policy and micro economic instability in Nigeria. The
researcher will consider in chapter one….the introduction of
the study which will in turn considers the following topics. The
background of the study, the statement of research problem,
the objective of the study, significance of the study, the
hypothesis and the structure of the work.
Chapter two focuses on the literature review; this chapter is
where the researcher extract materials from various books,
magazines, news papers and internet resources. In chapter
three, the researcher deals on research methodology while
chapter four is data analysis and interpretation. The finding,
summary and conclusion are in chapter five.
7
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Monetary policy is the process by which the government,
central bank, or monetary authority of a country controls
(i) the supply of money, (ii) availability of money, and (iii)
cost of money or rate of interest, in order to attain a set
of objectives oriented towards the growth and stability of
8
the economy. Monetary theory provides insight into how
to craft optimal monetary policy.
Monetary policy is primarily associated with interest rate
and credit. For many centuries there were only two forms
of monetary policy: (i) Decisions about coinage; (ii)
Decisions to print paper money to create credit. Interest
rates, while now thought of as part of monetary
authority, were not generally coordinated with the other
forms of monetary policy during this time. Monetary
policy was seen as an executive decision, and was
generally in the hands of the authority with seigniorage,
or the power to coin. With the advent of larger trading
networks came the ability to set the price between gold
and silver, and the price of the local currency to foreign
currencies. This official price could be enforced by law,
even if it varied from the market price.
With the creation of the Bank of England in 1694, which
acquired the responsibility to print notes and back them
with gold, the idea of monetary policy as independent of
executive action began to be established. The goal of
monetary policy was to maintain the value of the
9
coinage, print notes which would trade at par to specie,
and prevent coins from leaving circulation. The
establishment of central banks by industrializing nations
was associated then with the desire to maintain the
nation's peg to the gold standard, and to trade in a
narrow band with other gold-backed currencies. To
accomplish this end, central banks as part of the gold
standard began setting the interest rates that they
charged, both their own borrowers, and other banks who
required liquidity.
MPC meeting, 5th December, 2007 .
The Monetary Policy Committee of the CBN met on 5th
June, 2007 and decided to reduce the MPR by 200 basis
points, i.e from 10.0 per cent to 8.0 per cent. The width
of the interest rate corridor was also reduced from +/-300
to +/-250 basis points. The implication of these actions is
that the deposit facility now stands at 5.5 per cent while
the lending facility would be 10.5 per cent, both down
from 7 and 13 per cent, respectively.
10
1. MPC meeting, 3rd October, 2007
The Monetary Policy Committee of the CBN met on 3rd
October, 2007 and decided to raise the MPR to 9.0 per
cent which would be the repo rate and the rate at which
the CBN lends to banks. The deposit money banks'
deposits with the CBN will no longer earn interest. There
measures are intended, amongst others to deepen inter-
bank trading and encourage banks to free-up resources
to encourage credit market.
Additional Committees Set Up To Enhance
Formulation Of Monetary Policy
The newly constituted Fiscal Liquidity Assessment
Committee (FLAC) has the mandate to design and
regularly update the framework for obtaining information
for forecasting fiscal liquidity. Another committee is the
Liquidity Assessment Group (LAG) which takes decision
on intervention in domestic money and foreign exchange
markets.
2. Fiscal liquidity Assessment Committee (FLAC)
11
The Committee shall be made up of CBN Departments
that have responsibility for monetary policy formulation,
operations and monitoring; and ministries, departments
and agencies of the Federal Government involved in
fiscal operations.
Chairman: The MPD will serve as Chairman.
Members: The membership shall consist of the following
department. MPD, BOD, TED, RSD, FOD, from the bank;
FMF, Budget Office, customs & Excise, FIRS, NNPC, DPR,
OAGF, from government.
Functions: The Committee shall be responsible for:
Daily collection and update of liquidity data arising
from government fiscal operations – injections
(expenditures) and withdrawals (revenues)
particularly information on float and any intending
operations that have liquidity implications – through
the desk officers of the relevant departments for the
use of MPD in determining the system liquidity.
FLAC shall also forward the forecast fiscal liquidity to
the liquidity Assessment Groups.
12
Assembling all available information on projected
revenue and expenditure for the near future.
Making daily and monthly projection/forecasting to
determine the net fiscal injection and withdrawal of
liquidity to the system.
Meeting: The FLAC meet daily in the morning. However,
where the physical meeting may not take place, it is
expected that the Committee members would contact
one another through phone, e-mail e.t.c.
2. Liquidity Assessment Group (LAG)
Chairman : The Director, Banking Operations
Department shall serve as Chairman with Director, Trade
and Exchange Department as alternate Chairman.
Members: the Group shall be made up of CBN
departments involved in the conduct of monetary policy.
BOD, TED, MPD, RSD and FOD.
Functions: The Group would take decisions on
intervention in domestic money and foreign exchange
markets; and the mode and measure of such intervention
13
required to achieve optimum system liquidity position.
In specific terms, the LAG shall be responsible for making
suggestions on policy actions to be taken by the Group
each day in both forex and domestic money market
including:
The need for intervention
Timing of intervention
Size, type and tenor of instruments
LAG shall also decide the choice of market through
which intervention should be undertaken (whether
domestic money market or forex market).
The LAG shall communicate its decision to the MPIC
Chairman by 9.00 am every morning
The DG shall obtain approval from the Governor by
9.15 am
The LAG will build a data base on its expectations on
daily /weekly/monthly/yearly basis to facilitate
forecasts.
LAG will follow up implementation of policy
measures and report to MPIC
14
Meeting : The group shall meet at 8.45 am daily.
Liquidity Position: June, 2007
The Bank sustained its market driven approach to ensure
that the reserve money targets under the Policy Support
Instrument ( PSI ) programme were achieved in the first
half of 2007. Reserve money rose from N841.25 billion in
March, 2007, to N902.40 billion in May 2007, showing an
increase of N61.15 billion and excess liquidity of N42. 40
billion. However, at end-June, 2007, reserve money was
N858.20 billion compared with the target of N860 billion.
The attainment of the programme target in the second
quarter reflected the effect of the intensive liquidity mop-
up operations through the use of both the money market
and foreign exchange instruments.
1.2 Statement of the Research Problem
Monetarist macroeconomists have sometimes advocated
simply increasing the monetary supply at a low, constant
rate, as the best way of maintaining low inflation and
stable output growth. A central bank can only operate a
truly independent monetary policy when the exchange
rate is floating. If the exchange rate is pegged or
15
managed in any way, the central bank will have to
purchase or sell foreign exchange. Monetary decisions
today take into account a wider range of factors, such as:
short term interest rates;
long term interest rates;
velocity of money through the economy;
exchange rates ;
credit quality ;
bonds and equities (corporate ownership and debt);
government versus private sector spending/savings;
international capital flows of money on large scales;
financial derivatives such as options, swaps, futures
contracts, etc.
1.3 Research objectives
Over the years, the objectives of monetary policy have
remained the attainment of internal and external balance
of payments. However, emphasis on
techniques/instruments to achieve those objectives have
changed over the years. There have been two major
phases in the pursuit of monetary policy, namely, before
16
and after 1986. The first phase placed emphasis on direct
monetary controls, while the second relies on market
mechanisms.
Monetary Policy Performance in 2007
The framework for monetary policy management in 2007
remained that of monetary targeting. The Central Bank of
Nigeria (CBN) adopted various policy measures aimed at
containing the growth of monetary aggregates in order to
achieve monetary and price stability. Open Market
Operations (OMO) remained the major tool of liquidity
management. Other policy measures included increased
issuance of treasury securities in the primary market to
mop-up excess liquidity; use of deposit and lending
facility to encourage inter-bank transactions as well as
special sales of foreign exchange, including swap
arrangements. NTBs of various tenors (91-, 182- and 364-
day were auctioned during the period. In this research
work, the major objective is the analysis of monetary
policy and microeconomic instability in Nigeria.
17
1.4 Significance of the study.
This research will be of great interest and benefit to the
following:
1. The manager and chief executives of any company.
2. Producers, intermediaries, as well as management,
organizations/firms.
3. The students of marketing, accounting, economics and
business administration.
4. Likewise to aspiring businessmen and entrepreneur.
5. The diverse group of people and the dynamic
marketing partners as well as the society at large. The
diversified group of people above, must know how to
adapt to the marketing strategies, new technologies etc
6. Policy makers in government
7. Legal advisers
1.5 Hypothesis
It is a conjectural statement of the relationships between
two or more variables. It is testable, tentative problem
explanation of the relationship between two or more
variables that create a state of affairs or phenomenon.
18
E,C, Osuola (1986 page 48) said hypothesis should
always be in declarative sentence form, and they should
relate to them generally or specially variable to variables.
HYPOTHESIS THUS:
1. Explain observed events in a systematic manner
2. Predict the outcome of events and relationships
3. Systematically summarized existing knowledge.
In essence, there exist NULL HYPOTHESIS set up only to
nullify the research hypothesis and the ALTERNATIVE
HYPOTHESIS for the purpose of the study. For the
efficiency of the study, the hypothesis is as follows:
Null Hypothesis (HO)
1. Monetary policy does not rest on the relationship
between the rates of interest in an economy.
2.` Monetary policy is not one of the tools that a
national/federal Government uses to influence its
economy.
Alternative Hypothesis (HI)
19
1. Monetary policy rests on the relationship between the
rates of interest in an economy.
2. Monetary policy is one of the tools that a
national/federal Government uses to influence its
economy.
1.6 LIMITATION OF THE STUDY
This work was carried out under a tight schedule of
school pressure and work load which makes it absolutely
necessary to devote limited time to do it, having
sleepless night etc.
Another problem encountered is finance, the cost of
transportation in carrying out the investigation. Individual
differences in responses to questionnaire are also a
limitation encountered.
The Questionnaire method of primary data collection was
limited to the verbal responses of subjects to pre-arrange
questions. It also had limitation that its usefulness
depended on the level of education of the subjects. There
was the limitation of the problem of memory in
remembering past facts. The structured nature of the
20
questionnaire may compel the respondents to give
answers that they do not fully endorse, There was the
limitation of the rigidity of the research instrument, which
diminishes the amount of information that could be
gathered.
There was the limitation that the cost of administering
the questionnaire was very high due to high
administrative, personnel and traveling costs especially
when some of the respondents were initially not on their
seats. There was the limitation that the researcher and
the field data collectors were not policemen and so they
could not force some of the respondents if they refuse to
give answers. There was also the limitation of the
scarcity of time and money resources. In nutshell, we
want to mellow down this point to the following subtopics
Material Procurement
There was a lot constraints as to getting information and
materials for the job. The researcher made series of
consultations and visit to most renowned institutions to
acquire the needed information. Most materials used
21
were very difficult to come by, as there is no library
within the town.
Time Constraints
Combining academic work with job is no doubt a thought
provoking issue, as it has to do with time. Actually, a lot
of time was wasted as the researcher visited the
organizations and individuals together with government
agencies to obtain valuable information for the project.
Financial Constraints
The researcher would have obtained more information
than what is obtainable here but due to lack of money to
visit some of the firms and government agencies located
a bit farther from the researcher place of resident.
1.7 THE STRUCTURE OF THE RESEARCH WORK
This research work is to be organized in five chapters as
follows:
22
1. Introduction
2. Review of Related Literature
3. Research Methods and Producers
4. Data presentation and Analysis and
5. Summary, Findings, Conclusion and Recommendation
CHAPTER TWO
LITERATURE REVIEW
23
2.1 Monetary Policy before 1986.…………………..
The economic environment that guided monetary policy
before 1986 was characterized by the dominance of the
oil sector, the expanding role of the public sector in the
economy and over-dependence on the external sector. In
order to maintain price stability and a healthy balance of
payments position, monetary management depended on
the use of direct monetary instruments such as credit
ceilings, selective credit controls, administered interest
and exchange rates, as well as the prescription of cash
reserve requirements and special deposits. The use of
market-based instruments was not feasible at that point
because of the underdeveloped nature of the financial
markets and the deliberate restraint on interest rates.
The most popular instrument of monetary policy was the
issuance of credit rationing guidelines, which primarily
set the rates of change for the components and
aggregate commercial bank loans and advances to the
private sector. The sectoral allocation of bank credit in
CBN guidelines was to stimulate the productive sectors
and thereby stem inflationary pressures. The fixing of
24
interest rates at relatively low levels was done mainly to
promote investment and growth. Occasionally, special
deposits were imposed to reduce the amount of free
reserves and credit-creating capacity of the banks.
Minimum cash ratios were stipulated for the banks in the
mid-1970s on the basis of their total deposit liabilities,
but since such cash ratios were usually lower than those
voluntarily maintained by the banks, they proved less
effective as a restraint on their credit operations.
From the mid-1970s, it became increasingly difficult to
achieve the aims of monetary policy. Generally,
monetary aggregates, government fiscal deficit, GDP
growth rate, inflation rate and the balance of payments
position moved in undesirable directions. Compliance by
banks with credit guidelines was less than satisfactory.
The major source of problems in monetary management
were the nature of the monetary control framework, the
interest rate regime and the non-harmonization of fiscal
and monetary policies. The monetary control framework,
which relied heavily on credit ceilings and selective credit
controls, increasingly failed to achieve the set monetary
25
targets as their implementation became less effective
with time. The rigidly controlled interest rate regime,
especially the low levels of the various rates, encouraged
monetary expansion without promoting the rapid growth
of the money and capital markets. The low interest rates
on government debt instruments did not sufficiently
attract private sector savers and since the CBN was
required by law to absorb the unsubscribed portion of
government debt instruments, large amounts of high-
powered money were usually injected into the economy.
In the oil boom era, the rapid monetization of foreign
exchange earnings resulted in large increases in
government expenditure which substantially contributed
to monetary instability. In the early 1980s, oil receipts
were not adequate to meet increasing levels of demands
and since expenditures were not rationalised,
government resorted to borrowing from the Central Bank
to finance huge deficits. This had adverse implications for
monetary management
2.2 Monetary Policy Since 1986.……………………………
The Structural Adjustment Programme (SAP) was adopted
26
in July, 1986 following the crash in the international oil
market and the resultant deteriorating economic
conditions in the country. It was designed to achieve
fiscal balance and balance of payments viability by
altering and restructuring the production and
consumption patterns of the economy. These would be
achieved by eliminating price distortions, reducing heavy
dependence on crude oil exports and consumer goods
imports, enhancing the non-oil export base and achieving
sustainable growth. Other aims were to rationalise the
role of the public sector and accelerate the growth
potentials of the private sector. The main strategies of
the programme were the deregulation of external trade
and payments arrangements, the adoption of a market-
determined exchange rate for the Naira, substantial
reduction in complex price and administrative controls
and more reliance on market forces as a major
determinant of economic activity.
The objectives of monetary policy since 1986 remained
the same as in the earlier period, namely: the stimulation
of output and employment, and the promotion of
27
domestic and external stability. In line with the general
philosophy of economic management under SAP,
monetary policy was aimed at inducing the emergence of
a market-oriented financial system for effective
mobilization of financial savings and efficient resource
allocation. The main instrument of the market-based
framework is the open market operations. This is
complemented by reserve requirements and discount
window operations. The adoption of a market-based
framework such as OMO in an economy that had been
under direct control for long, required substantial
improvement in the macroeconomic, legal and regulatory
environment.
In order to improve macroeconomic stability, efforts were
directed at the management of excess liquidity; thus a
number of measures were introduced to reduce liquidly
in the system. These included the reduction in the
maximum ceiling on credit growth allowed for banks; the
recall of the special deposits requirements against
outstanding external payment arrears to CBN from
banks, abolition of the use of foreign guarantees/currency
28
deposits as collaterals for Naira loans and the withdrawal
of public sector deposits from banks to the CBN. Also
effective August, 1990, the use of stabilization securities
for purposes of reducing the bulging size of excess
liquidity in banks was re-introduced. Commercial banks'
cash reserve requirements were increased in 1989, 1990,
1992, 1996 and 1999.
The rising level of fiscal deficits was identified as a major
source of macroeconomic instability. Consequently,
government agreed not only to reduce the size of its
deficits but also to synchronize fiscal and monetary
policies. By way of inducing efficiency and encouraging a
good measure of flexibility in banks' credit operations,
the regulatory environment has improved. Consequently,
the sector-specific credit allocation targets were
compressed into four sectors in 1986, and to only two in
1987. From October, 1996, all mandatory credit
allocation mechanisms were abolished. The commercial
and merchant banks were subjected to equal treatment
since their operations were found to produce similar
effects on the monetary process. Areas of perceived
29
disadvantages to merchant banks were harmonized in
line with the need to create a conducive environment for
their operations. The liquidity effect of large deficits
financed mainly by the Bank led to an acceleration of
monetary and credit aggregate in 1998, relative to
stipulated targets and the performance in the preceding
year. Outflow of funds through the CBN weekly foreign
exchange transaction at the Autonomous Foreign
Exchange Market (AFEM) and, to a lesser extent, at Open
Market Operation (OMO) exerted some moderating
effect.
The reintroduction of the Dutch Auction system (DAS) of
foreign exchange management in July, 2002 engendered
relative stability, and stemmed further depletion of
reserves during the second half of 2002. However, the
financial system was typically marked by rapid expansion
in monetary aggregates, particularly during the second
half of 2000, influenced by the monetization of enhanced
oil receipts. Consequently, monetary growth accelerated
significantly, exceeding policy targets by substantial
margins. Savings rate and the inter-bank call rates fell
30
generally due to the liquidity surfeit in the banking
system though the spread between deposit and lending
rates remained wide.
2.3 Implication Of The New CBN Act On The Formulation Of Monetary Policy
In line with the CBN Act, 2007, one of the principal
functions of the Central Bank of Nigeria is to “ensure
monetary and price stability” In order to facilitate the
attainment of the objective of price stability and to
support the economic policy of the Federal government,
the Act provides the constitution of a Monetary Policy
Committee (MPC) which will comprise the Governor as
the Chairman, 4 Deputy Governor's two members of the
Board of Directors of the Bank, three members appointed
by the President and 2 members appointed by the
Governor.
The implication for the formulation of monetary policy is
that with the new mandate derived from the CBN Act and
the composition of the MPC, monetary policy credibility of
the Bank will be strengthened. This is because monetary
31
policy will now be conducted in a more open and forward
looking way.
2.4 Trends in central banking
The central bank influences interest rates by expanding
or contracting the monetary base, which consists of
currency in circulation and banks' reserves on deposit at
the central bank. The primary way that the central bank
can affect the monetary base is by open market
operations or sales and purchases of second hand
government debt, or by changing the reserve
requirements. If the central bank wishes to lower interest
rates, it purchases government debt, thereby increasing
the amount of cash in circulation or crediting banks'
reserve accounts. Alternatively, it can lower the interest
rate on discounts or overdrafts (loans to banks secured
by suitable collateral, specified by the central bank). If
the interest rate on such transactions is sufficiently low,
commercial banks can borrow from the central bank to
meet reserve requirements and use the additional
liquidity to expand their balance sheets, increasing the
credit available to the economy. Lowering reserve
32
requirements has a similar effect, freeing up funds for
banks to increase loans or buy other profitable assets.
2.5 Developing countries
Developing countries may have problems establishing an
effective operating monetary policy. The primary
difficulty is that few developing countries have deep
markets in government debt. The matter is further
complicated by the difficulties in forecasting money
demand and fiscal pressure to levy the inflation tax by
expanding the monetary base rapidly. In general, the
central banks in many developing countries have poor
records in managing monetary policy. This is often
because the monetary authority in a developing country
is not independent of government, so good monetary
policy takes a backseat to the political desires of the
government or are used to pursue other non-monetary
goals. For this and other reasons, developing countries
that want to establish credible monetary policy may
institute a currency board or adopt dollarization. Such
33
forms of monetary institutions thus essentially tie the
hands of the government from interference and, it is
hoped, that such policies will import the monetary policy
of the anchor nation.
Recent attempts at liberalizing and reforming the
financial markets (particularly the recapitalization of
banks and other financial institutions in Nigeria and
elsewhere) are gradually providing the latitude required
in order to implement monetary policy frameworks by the
relevant central banks.
2.6 Types of monetary policy
In practice, all types of monetary policy involve modifying
the amount of base currency (M0) in circulation. This
process of changing the liquidity of base currency
through the open sales and purchases of (government-
issued) debt and credit instruments is called open market
operations.
Constant market transactions by the monetary authority
modify the supply of currency and this impacts other
34
market variables such as short term interest rates and
the exchange rate.
The distinction between the various types of monetary
policy lies primarily with the set of instruments and
target variables that are used by the monetary authority
to achieve their goals.
Monetary Policy: Target Market Variable: Long Term Objective:
Inflation Targeting Interest rate on overnight debt A given rate of change in the CPI
Price Level Targeting Interest rate on overnight debt A specific CPI number
Monetary Aggregates The growth in money supply A given rate of change in the CPI
Fixed Exchange Rate The spot price of the currency The spot price of the currency
Gold Standard The spot price of gold Low inflation as measured by the gold price
Mixed Policy Usually interest rates Usually unemployment + CPI change
2.7 Types of monetary policy
The different types of policy are also called monetary
regimes, in parallel to exchange rate regimes. A fixed
exchange rate is also an exchange rate regime; The Gold
standard results in a relatively fixed regime towards the
currency of other countries on the gold standard and a
floating regime towards those that are not. Targeting
35
inflation, the price level or other monetary aggregates
implies floating exchange rate unless the management of
the relevant foreign currencies is tracking the exact same
variables (such as a harmonized consumer price index).
Inflation targeting
Under this policy approach the target is to keep inflation,
under a particular definition such as Consumer Price
Index, within a desired range.
The inflation target is achieved through periodic
adjustments to the Central Bank interest rate target. The
interest rate used is generally the interbank rate at which
banks lend to each other overnight for cash flow
purposes. Depending on the country this particular
interest rate might be called the cash rate or something
similar.
The interest rate target is maintained for a specific
duration using open market operations. Typically the
duration that the interest rate target is kept constant will
vary between months and years. This interest rate target
36
is usually reviewed on a monthly or quarterly basis by a
policy committee.
Changes to the interest rate target are made in response
to various market indicators in an attempt to forecast
economic trends and in so doing keep the market on
track towards achieving the defined inflation target. For
example, one simple method of inflation targeting called
the Taylor rule adjusts the interest rate in response to
changes in the inflation rate and the output gap. The rule
was proposed by John B. Taylor of Stanford University.
The inflation targeting approach to monetary policy
approach was pioneered in New Zealand.
Price level targeting
Price level targeting is similar to inflation targeting
except that CPI growth in one year is offset in subsequent
years such that over time the price level on aggregate
does not move.
2.8 Fixed exchange rate
37
This policy is based on maintaining a fixed exchange rate
with a foreign currency. There are varying degrees of
fixed exchange rates, which can be ranked in relation to
how rigid the fixed exchange rate is with the anchor
nation.
Under a system of fiat fixed rates, the local government
or monetary authority declares a fixed exchange rate but
does not actively buy or sell currency to maintain the
rate. Instead, the rate is enforced by non-convertibility
measures (e.g. capital controls, import/export licenses,
etc.). In this case there is a black market exchange rate
where the currency trades at its market/unofficial rate.
Under a system of fixed-convertibility, currency is bought
and sold by the central bank or monetary authority on a
daily basis to achieve the target exchange rate. This
target rate may be a fixed level or a fixed band within
which the exchange rate may fluctuate until the
monetary authority intervenes to buy or sell as necessary
to maintain the exchange rate within the band. (In this
case, the fixed exchange rate with a fixed level can be
38
seen as a special case of the fixed exchange rate with
bands where the bands are set to zero.)
Under a system of fixed exchange rates maintained by a
currency board every unit of local currency must be
backed by a unit of foreign currency (correcting for the
exchange rate). This ensures that the local monetary
base does not inflate without being backed by hard
currency and eliminates any worries about a run on the
local currency by those wishing to convert the local
currency to the hard (anchor) currency.
2.9 Gold standard
The gold standard is a system in which the price of the
national currency as measured in units of gold bars and is
kept constant by the daily buying and selling of base
currency to other countries and nationals. (i.e. open
market operations, cf. above). The selling of gold is very
important for economic growth and stability.
The gold standard might be regarded as a special case of
the "Fixed Exchange Rate" policy. And the gold price
39
might be regarded as a special type of "Commodity Price
Index".
2.10 Monetary policy tools
Monetary baseMonetary policy can be implemented by changing the
size of the monetary base. This directly changes the total
amount of money circulating in the economy. A central
bank can use open market operations to change the
monetary base. The central bank would buy/sell bonds in
exchange for hard currency. When the central bank
disburses/collects this hard currency payment, it alters
the amount of currency in the economy, thus altering the
monetary base.
Reserve requirementsThe monetary authority exerts regulatory control over
banks. Monetary policy can be implemented by changing
the proportion of total assets that banks must hold in
reserve with the central bank. Banks only maintain a
small portion of their assets as cash available for
immediate withdrawal; the rest is invested in illiquid
assets like mortgages and loans. By changing the
proportion of total assets to be held as liquid cash, the
40
Federal Reserve changes the availability of loanable
funds. This acts as a change in the money supply. Central
banks typically do not change the reserve requirements
often because it creates very volatile changes in the
money supply due to the lending multiplier.
Discount window lending
Many central banks or finance ministries have the
authority to lend funds to financial institutions within
their country. By calling in existing loans or extending
new loans, the monetary authority can directly change
the size of the money supply.
Interest rates
The contraction of the monetary supply can be achieved
indirectly by increasing the nominal interest rates.
Monetary authorities in different nations have differing
levels of control of economy-wide interest rates. In the
United States, the Federal Reserve can set the discount
rate, as well as achieve the desired Federal funds rate by
41
open market operations. This rate has significant effect
on other market interest rates, but there is no perfect
relationship. In the United States open market operations
are a relatively small part of the total volume in the bond
market. One cannot set independent targets for both the
monetary base and the interest rate because they are
both modified by a single tool — open market operations;
one must choose which one to control.
In other nations, the monetary authority may be able to
mandate specific interest rates on loans, savings
accounts or other financial assets. By raising the interest
rate(s) under its control, a monetary authority can
contract the money supply, because higher interest rates
encourage savings and discourage borrowing. Both of
these effects reduce the size of the money supply.
Currency board
A currency board is a monetary arrangement which pegs
the monetary base of a country to that of an anchor
nation. As such, it essentially operates as a hard fixed
exchange rate, whereby local currency in circulation is
42
backed by foreign currency from the anchor nation at a
fixed rate. Thus, to grow the local monetary base an
equivalent amount of foreign currency must be held in
reserves with the currency board. This limits the
possibility for the local monetary authority to inflate or
pursue other objectives. The principal rationales behind a
currency board are three-fold:
1. To import monetary credibility of the anchor nation;
2. To maintain a fixed exchange rate with the anchor
nation;
3. To establish credibility with the exchange rate (the
currency board arrangement is the hardest form of
fixed exchange rates outside of dollarization).
In theory, it is possible that a country may peg the local
currency to more than one foreign currency; although, in
practice this has never happened (and it would be a more
complicated to run than a simple single-currency
currency board). A gold standard is a special case of a
currency board where the value of the national currency
is linked to the value of gold instead of a foreign
currency.
43
CHAPTER THREE
RESEARCH METHODS AND PROCEDURES
3.1 RESEARCH DESIGNThe research method selected for the study is a
combination of a survey and an industrial study. The
survey research method is described hereunder that:
(i) It is a design in which primary data is gathered from
members of the sample that represents a specific
population;
(ii) It is a design in which a structure and systematic
research instrument like a questionnaire or an interview
schedule is utilized together with the primary data;
(ii) It is a method in which the researcher manipulates no
explanatory variables because they have already
occurred and so they cannot be manipulated;
(iii) Data are got directly from the subjects;
The subjects give the data the natural settings of their
workplaces;
44
(iv) The answers of the respondents are assumed to be
largely unaffected of the content in which they are
brought;
(v) The impacts of the confounding factors are “controlled”
statistically; and
(vi) The aim of the research may span from the exploration
phenomena to hypotheses testing (stone 1995).
The survey research method has some merit, which are
to be articulated hereunder: In the survey research
method, the sample of the respondents are selected in
such a way as to make it low due to the utilization of big
sample sizes, which results in generally low sample
errors.
The survey research method also has the merit that data
collection takes place in the “natural” settings of the
workplace rather than an activated laboratory. Data are
got directly from the respondents. The advantage that
the survey yields data that suggests new hypothesis is
very illuminating. There is also the merit that a set of
systematic data collection instruments such as
questionnaire interview schedules and observation
45
gadgets can either be used alone or in conjunction with
other instruments (stone, 1995).
3.2 SAMPLING
Spiegel (1992) observes that sampling theory is a study
of the relationship existing between a population or
universe and the samples drawn from it. The population
in this study is from the senior junior staff of the firms. In
order to make conclusions of sample theory and
statistical references to be valid, a sample must be
selected as to be representative of the population
(Spiegel,1992). One way in which a representative
sample may be got, is by the process of stratified random
sampling. In this research work, the technique of simple
random sampling is used to select the sample of 100
respondents from each group of the personnel, making a
total sample size of 200.
The list of all senior and junior staff of the firm is from the
personnel department of the company. The numbers
were written on a piece of paper, put in a basket and the
papers were folded to cover the numbers and one of the
pieces of paper was selected at a time without replacing
46
it and any name corresponding to the number becomes a
number of the sample. This method of sampling without
replacement was done until the sample of 100
respondents per group of personnel was arrived at.
3.3 Population
The population, in this study is the totality of the senior
and junior staff of Nigeria Labour Congress (Delta State
Chapter. Warri.
The sample size is 200 and this number of respondents
was chosen from the population. The rationale for
studying a sample rather than the population includes
that:
1. Most empirical research work in the social science
involves studying a sample in place of the population.
2. Statistical Laws reveal that statistics composed
from the sample data are usually reasonably accurate.
3. Luckily, it is usually possible to estimate the level
of confidence that can be placed on the results.
We should note that above is only possible if the
probability sample size is large enough.
47
3.4 DATA COLLECTION
Questionnaire
As earlier stated, the primary data collection instrument
in this study is the questionnaire. In the questionnaire
method of primary data collection, heavy dependence is
placed on verbal reports from the subjects to get
information on the earnings per share and standard set.
The questionnaire has a lot of merits. It needs less skill to
administer. Questionnaire can be administered to a big
number of individuals at the same time. Also with a
specific research budget, it is usually possible to cover a
broader area. The impersonal nature of a questionnaire,
its structure and standardized wording, its order of
question, its standardized instructions for recording
answers might make one to conclude that it offers some
uniformity from one measurement occasion to another
(Selltiz et al, 1976).
Another merit of questionnaire is that subjects may have
a bigger confidence in their anonymity, and thus feel
freer to express views they feel might be disapproved.
48
Another attribute of the questionnaire that is sometimes,
though not always desirable is that it might place less
pressure on the subjects for immediate response (Selltiz
et al, 1976).
The questionnaire also has some demerits. It has noted
that for purpose of giving dependable responses to a
questionnaire, respondents must be considerably
educated. Thus one of the demerits of the usual
questionnaire is that it is appropriate only for with a
considerable amount of education. There is also demerit
that subject may be reluctant and unable.
To report on the particular subject matter. Also, if a
subject misinterprets a question or give his or her answer
in a batting manner, there is often a little that can be
done to ameliorate the situation. In a questionnaire, the
information the researcher gets is limited to the fixed
alternative answer format, when a specific answer is not
available, it can lead to error (Selltiz, 1976).
There is also limitation of memory in reporting on past
facts. The researcher is not a policeman that can compel
answers. That is, the information may not be readily
49
accessible to subject and thus the subject may be
reluctant to put forth enough alternative information that
he or she is only barely conscious of (Selltiz et al, 1996).
In this research project, a structured and undisguised
questionnaire is utilized which is made up of two parts
namely, the personal data section and the section on the
data on the actual subject matter of the work. The
questionnaire was undisguised in the sense that the
purpose of the data collection which was to collect
primary data for writing up the researcher’s HND project
was made know to the 200 respondents. The
questionnaire was structured in the sense the questions
are logically sequenced and are to be asked to the
respondents in the same manner and no follow up
questions are to be allowed. Some of the questions are of
the fixed alternative answer format type.
Ten (10) of the questions have yes or no answers,
Ten (10) of the questions have alternative answer for the
respondents to tick.
The structured questionnaire has the merit that it yields
data that is easier to analysis than data produced by an
50
unstructured questionnaire. Also the structured nature
diminishes both researcher’s and research instrument
biases. It however has the demerit that the rigidity of the
research instrument diminishes the amount of
information that could be got.
Interview
The method of communication of the research instrument
is by means of the personal interview. The method has
the merit that it produces a better sample of the
population than either mail or the telephone methods. It
also has the merit that it gives a very high completion
and response rates. It has the merit that the interview
has a bigger sensitively misunderstandings by the
respondents and gives a chance for clarification of
misunderstood questions. It has the merit that it is a very
feasible method (Selltiz et al, 1976). The personal
interview method has the demerit that it is more costly
than the mail or the telephone methods of
communication of a questionnaire.
Observations
51
In addition to questionnaire and face-to face interviews,
observation was also carried out. This was to enable the
researcher to witness by herself the officers of this firm
and to interact with these people.
3.5 FIELD WORK
The researcher and three other field data collectors did
the fieldwork. The field data collectors were other
classmates also offering the Part-time HND program, who
have also offered research methodology. They had no
problem gaining entrance into the office under
consideration since one of them has a friend working
there. They were to be trained by the researcher on how
to greet the respondents and how to tick the
questionnaire correctly and honestly.
3.6 DESCRIPTION OF DATA PRESENTATION AND
ANALYSIS TOOLS
The data presentation tools are simple bar charts,
histograms, and pictorial tables. The most important
parts of a table include;
52
(a) Table numbers
(b) Title of the table
(c) Caption
(d) Stub or the designation of the rows and columns
(e) The body of the table.
(f) The head note or prefatory note or explanatory just
before the title.
(g) Source note, which refers to the literally or scientific
source of the table (Mills and Walter 1995)
Anyiwe (1994) has observed that a table has the
following merits over a prose information that;
(f) A table ensure an easy location of the required
figure;
(g) Comparisons are easily made utilizing a table than a
prose information;
(h) Patterns or trends within the figures which cannot
be visualized in the prose information can be revealed
and better depicted by a table; and
A table is more concise and takes up a less space than a
prose formation:
53
The data is to be analysed by means of percentage, cross
tabulation and the chi-square test of population
proportions for testing the two hypothesis. Percentages
express the ratio of two sets of data to a common base of
100. The researcher made us of the computer program
called SPSS (statistical package for social science) to
carry out the computation of the hypothesis testing.
3.7 Limitation of The Study
Research work is subject to one form of limitation or the
other, mine is not an exemption.
It was the initial thought of the researcher that the
exercise was easy but the contrary was the case. As a
student, several academic demands compete with the
limited but precious time available.
This implies that none of the competing exercise could be
effectively handled without the others being worse off.
This was my situation. Although the time expended was
too small to do justice to the study. The opportunity cost
in terms of other equally important activities forgone or
cursorily attended to, was made.
54
The researcher faces some embarrassment arising from
low-level educated staff who could not understand the
essence of the research work as this.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 INTRODUCTION
55
In the previous chapter, the research methods and
procedures have been handled. In this chapter the data
presentation and analysis are to be done. The data is to
be presented by means of tables, two simple bar charts,
one histogram and one pie chart to make it amenable for
further analysis. By analysis is meant the act of noting
relationship and aggregating the set of variables with
similar attributes and also breaking the unit of their
components (Mills and Walters 1995).
In this research work, the research accepts the
contention of Podsakoff and Dalton (1995) that the
factual information from the data can be used as a basis
for reasoning, calculation and discussion.
Apart from the heading above, the other headings in this
chapter include:
Data Presentation,
Percentage analysis
Cross-tabulated analysis
Hypothesis testing
4.2 DATA PRESENTATION
TABLE 4.1THE SUMMARY OF THE PERSONAL DATA
56
OF THE RESPONDENTS
1
2
3
4
SEXMale
FemaleTotal
Marital StatusMarriedSingleTotal
AGE21-30 years31-40 years41-50 years51-60 years
Total
HIGHEREDUCATIONAL
QUALIFICATIONDIPLOMA
ONDHND
FIRST DEGREESECOND DEGREE
NIMTOTAL
FREQUENCY15050200
13070200
90901010200
103080204020200
Anglessubtendedin degree
1854144367236360
The marital statuses of the 200 respondents it is found that
130 of them are married while 70 of them are single. For
the ages of the 200 respondents they are 21-30 years, 31-
40 years, 40-50 years, 51-60 years with frequency of 90,10
respectively. For the educational qualification of the 200
respondents they are diploma, OND, HND, First Degree,
Second Degree, NIM. and they have frequencies of 10, 30,
80, 20, 40 and 20 respectively.
57
Figure 4.1 below shows the simple bar chart of the data on
the sex of the respondents.
FIGURE 4.1: THE SIMPLE BAR CHART OF THE DATA ON THE SEX OF THE RESPONDENTS
GENDER OF THE RESPONDENTS
TABLE 2. GENDER OF THE RESPONDENTS
Source: from data in table 1 (generated from SPSS) statistical package for social science.
From figure 4.1 above, it is shown that male respondents
have the modal frequency of 150 out of the 200
58
Frequency
percentage
Valid Percent
Cumulative Percent
MAIL 150 75.0 75.0 75.0FEMAL
E50 25.0 25.0 100.0
Total 200 100.0 100.0
160
140
120
100
80
60
40
20
0
-
-
-
-
-
-
-
-
-
MAIL FEMALE
Fre
quen
cy
Gender
respondents while the female respondents have the
frequency of 50 of them.
Figure 4.2 below shows the simple bar chart of the data
on the marital statuses of the respondents.
FIGURE 4.2: THE SIMPLE BAR CHART OF THE DATA ON THE MARITAL STATUSES OF THE RESPONDENTS
TABLE 4.3. MARITAL STATUS OF THE RESPONDENTS
From figure 4.2 above, it is shown that the married respondents
have the modal frequency of 130 out of the 200 respondents while
the single respondents have the frequency of 70 of them.
FIGURE 4.3: THE HISTOGRAM OF THE DATA ON THE AGES OF THE RESPONDENTS.
59
Status frequency
Percentage
Valid Percent
Cumulative Percent
MARRIED 130 65.0 65.0 65.0SINGLE 70 35.0 35.0 100.0Total 200 100.0 100.0
140
120
100
80
60
40
20
0
-
-
-
-
-
-
-
-MARRIED SINGLE
Fre
quen
cy
Marital status
AGES OF THE RESPONDENTS
TABLE 4. AGES OF THE RESPONDENTS
SOURCE: From the data in Table 1.
60
020
4060
8010
0
1.0 2.0 3.0 4.0
Categories(years)
Frequency
Percentage
ValidPercentag
e
Cumulative Percent
21 TO 30 90 45.0 45.0 45.0
31 TO 40 90 45.0 45.0 90.0
41 TO 50 10 5.0 5.0 95.0
51 TO 60 10 5.0 5.0 100.0
Total 200 100.0 100.0
Fre
quen
cy
Age group
From figure 4.3 above, it is shown that the age classes
limit are 20.5-30.5 years, 30.5-40.5 years, 40.5-50.5
years and 50.5-60.5 years with frequencies of 90, 90, 10,
and 10 out of 200 respectively. This shows that this is bi-
modal distribution as the age classes of 20.5-30.5 years
and 30. 5-40.5 years have a frequency of 10.
Figure 4.4 below shows the pie chart of the data on the
highest educational qualifications of the 200
respondents.
FIG.4.4 THE PIE CHART OF THE DATA ON THE HIGHEST EDUCATIONAL QUALIFICATIONS OF THE 200 RESPONDENTS
61
15%
5%
10%
80%
10%
20%
FIRST DEGREE
OND DIPLOMA
FIRST DEGREE
OND
SECOND DEGREE
HND
TABLE 4. 5 EDUCATIONAL QUALIFICATION OF THE RESPONDENTS
SOURCE: from the data in table 1.
From figure 4.4 above, the Educational Qualifications are
Diploma, O.N.D, First Degree, Second Degree and NIM
and the subtended angles in degrees are equal to 180,
540, 1440, 360, 720 and 360 and respectively at the center
of the circle.
4.3 CROSS-TABULATED ANALYSIS
Table bellow show the analysis of the statuses of the 200
respondents
62
Educational level
Frequency Percentage Valid Percentage
Cumulative Percentag
eDIPLOMA 10 5.0 5.0 5.0
OND 30 15.0 15.0 20.0
HND 80 40.0 40.0 60.0
FIRST DEGREE 20 10.0 10.0 70.0
SECOND DEGREE
40 20.0 20.0 90.0
NIM 20 10.0 10.0 100.0
Total 200 100.0 100.0
TABLE 6. CROSS- TABULATION 1
The above table shows that the total of 100 respondents
(out of 200 said YES. This proved that Monetary policy
rests on the relationship between the rates of interest in
an economy.
TABLE 7. Cross-tabulation 2
The above table indicates that Monetary policy is one of
the tools that national/federal Government uses to
63
DIPLOMA OND HND
FIRST DEGREE SECOND DEGREE NIM
Total
Monetary policy rests on the relationship between the rates of interest in an economy.
YES NO DON’T KNOW
NOANSWER
Total
61960
-3121100
2
3110
43
2
9
11
2
7
9
39
12 19
91
263121200
939
DIPLOMA 10 10 OND 19 19 HND 14 30 47 91
FIRST DEGREE 10 9 19 SECOND DEGREE 40 40 NIM 21 21
Total 104 40 47 9 200
Monetary policy is one of the tools that a national/federal Government uses to influence its economy.
YES NODON’TKNOW
NOANSWER Total
influence its economy. 104 respondents out of 200 said
yes. While 40 did not agree with the fact.
4.4 HYPOTHESIS TESTING
In attempting to arrive at decisions about the population,
on the basis of sample information, it is necessary to
make assumptions or guesses about the population
parameter involved. Such an assumption is called
statistical hypothesis, which may or may not be true. The
procedure, which enables the researcher to design on the
basis, is sample regards whether a hypothesis is true or
not is called test of hypothesis or test of significance.
The null hypothesis asserts that there is no significant
difference between the statistics and the population
parameters and what ever is observed difference is
there, is merely due to fluctuations in sampling from the
same population. Null hypothesis is thereby denoted by
the symbol H0. Any hypothesis, which contradicts the H0,
is called an alternate hypothesis and is denoted by the
symbol H1.
The researcher used chi-square analysis.
64
CHI-SQUARE TEST
The c is one of the simplest and most widely used non-
parametric test in statistical work. It makes no
assumptions about the population being sampled. The
quantity c describes the magnitude of discrepancy
between theory and observation i.e. with the help of c
test we can know whether a given discrepancy between
theory and observation can be attributed to chance or
whether it results from the inadequacy of the theory to fit
the observed facts. If c is zero, it means that the
observed and expected frequencies completely coincide.
The greater the value of c the greater will be the
discrepancy between observed and expected
frequencies.
The formula for computing chi-square is –
c =(O-E)2/E
Where,O=Observed frequency
E=Expected or theoretical frequency
4.5 SOFTWARE USED FOR DATA ANALYSIS:
65
For the data analysis and the interpretation, the
researcher has adopted advanced version of SPSS
(statistical package for social science). This application
software has facilitated the researcher to construct the
frequency table, various types of charts and to find out
the valid percentage responses from the sample. By this
automated data analysis it has minimized the
researcher’s time constraints and reduced human error
and give also accurate outlay of information.
Chi-Square Test (1)
Monetary policy rests on the relationship between
the rates of interest in an economy.Observed
F
ExpectedF
Residual Decision
YESNO DON’TKNOW NOANSWERTotal
10043
39
18 200
50.050.0
50.050.0
50.0 -7.0
-11.0
-32.0
AcceptReject
Reject
Reject
Chi-Square Test (2)
66
Monetary policy is one of the tools that a national/federal Government uses to influence its
economy.
Residuals
The observed value of the dependent variable minus the
value predicated by the regression equation, for each
case. Large absolute values for the residuals indicate that
the observed values are very different from the predicted
values.
SOURCE: From the questionnaires administered.
The formulated hypothesis that is subject to statistical
test is at 5% level of significance in testing hypothesis,
the calculated value of the test statistics is usually
compared with tables of value. The critical values of the
test statistics serve as criterion value. It afforded the
basis for rejecting the null hypothesis is a function of the
value of the tested statistic. Reject the null hypothesis if
67
Observed
F
ExpectedF
Residual Decision
YESNO DON’TKNOW NOANSWERTotal
10440
47 9 200
50.050.0
50.0
50.0
54.0 -10.0
-3.0
-41.0
AcceptReject
Reject
Reject
the calculated value of the test statistic is greater than
the critical value. Accept the null hypothesis if the
calculated value of the test statistic is less than the
critical value.
TEST STATISTICS
note: df = degree of freedom
4.6 SUMMARY OF RESULT
Level of significance……….0.05
Critical value………………………43.0
Calculated value……………………73.880
From the above analysis, it could be seen that in the first
test, Monetary policy rests on the relationship between
the rates of interest in an economy , the calculated value
68
Monetary policy rests on
the relationship between
the rates of interest in
an economy.
Monetary policy is one of the tools that a national/federal Government uses to influence its economy.
Chi-Squaredf
73.880 3
94.120 3
is greater than the critical value so we reject the
hypothesis.
In the second test which state that, Monetary policy is
one of the tools that a national/federal Government uses
to influence its economy. The level of significance is 0.05,
the critical value is 44 while the calculated value from the
test statistics table is 94.120. Looking the data above, it
shows very clear that the calculated value is greater
than the critical value so we reject the hypothesis.
CHAPTER FIVE
FINDINGS, SUMMARY AND CONCLUSION
69
5.0 INTRODUCTION
In this chapter, the researcher deals with the findings as regards
monetary policy and microeconomic instability in Nigeria. The work
is summarized with the conclusion drawn.
5.1 FINDINGS
During the curse running the project, the researcher
discovered that Monetary policy is the process by
which the government, central bank, or monetary
authority of a country controls (i) the supply of money,
(ii) availability of money, and (iii) cost of money or rate of
interest, in order to attain a set of objectives oriented
towards the growth and stability of the economy.[1]
Monetary theory provides insight into how to craft
optimal monetary policy.
Monetary policy is referred to as either being an
expansionary policy, or a contractionary policy, where an
expansionary policy increases the total supply of money
in the economy, and a contractionary policy decreases
the total money supply. Expansionary policy is
traditionally used to combat unemployment in a
recession by lowering interest rates, while contractionary
70
policy involves raising interest rates in order to combat
inflation. Monetary policy is contrasted with fiscal policy,
which refers to government borrowing, spending and
taxation.
5.3 SUMMARY
Monetary policy rests on the relationship between the
rates of interest in an economy, that is the price at which
money can be borrowed, and the total supply of money.
Monetary policy uses a variety of tools to control one or
both of these, to influence outcomes like economic
growth, inflation, exchange rates with other currencies
and unemployment. Where currency is under a monopoly
of issuance, or where there is a regulated system of
issuing currency through banks which are tied to a
central bank, the monetary authority has the ability to
alter the money supply and thus influence the interest
rate (in order to achieve policy goals).
5.4 CONCLUSION
Monetary policy is one of the tools that a federal Government
uses to influence its economy. Using its monetary authority to
71
control the supply and availability of money, a government
attempts to influence the overall level of economic activity in
line with its political objectives. Usually this goal is
"macroeconomic stability" - low unemployment, low inflation,
economic growth, and a balance of external payments.
Monetary policy is usually administered by a Government
appointed ”Bank", the Central Bank of Nigeria. The Central
Bank attempts to achieve economic stability by varying the
quantity of money in circulation, the cost and availability of
credit, and the composition of a country's national debt. The
Central Bank has three instruments available to it in order to
implement monetary policy:
1. Open market operations
2. Reserve requirements
3. The 'Discount Window'
References
1. "Monetary Policy". Federal Reserve Board. January 3, 2006. http://www.federalreserve.gov/policy.htm.
2. B.M. Friedman "Monetary Policy," International Encyclopedia of the Social & Behavioral Sciences, 2001, pp. 9976-9984. Abstract.
3. Forder, James. ""Credibility" in Context: Do Central Bankers and Economists Interpret the Term Differently?" (December 2004). [1]
72
4. "Bank of England founded 1694". BBC. March 31, 2006. http://www.bbc.co.uk/history/timelines/britain/stu_eng_bank.shtml.
5. "Federal Reserve Act". Federal Reserve Board. May 14, 2003. http://www.federalreserve.gov/generalinfo/fract/.
6. Milton Friedman (1960), A Program for Monetary Stability. Fordham University Press.
7. Ben Bernanke (2006), 'Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective'.
8. Edward Nelson (2007), 'Milton Friedman and U.S. Monetary History: 1961-2006', Federal Reserve Bank of St. Louis Review 89 (3), page 171.
9. Blog: Favorite Friedman quotes 10. Wikiquote 11. "Exchange Rates". The Library of Economics and
Liberty. March 31, 2006. http://www.econlib.org/library/ENC/ExchangeRates.html.
12. Athanasios Orphanides (2008). "Taylor rules," The New Palgrave Dictionary of Economics, 2nd Edition. v. 8, pp. 200-04.Abstract.
13. http://www.bos.frb.org/economic/neer/neer2002/ neer202l.pdf
14. "Monetary Policy Framework". Bank Of England. 2006. http://www.bankofengland.co.uk/monetarypolicy/framework.htm.
15. "U.S. Monetary Policy: An Introduction". Federal Bank of San Francisco. 2004. http://www.frbsf.org/publications/federalreserve/monetary/.
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