AN ECONOMETRICAL ANALYSIS OF MONETARY POLICY ON THE ECONOMY OF NIGERIA

1.0 Introduction

1.1 Background Of The Study

One of the ways taken by all economy to make the banking sector effective is the use of the monetary policy introduced by the federal government and carried out by the apex bank of the country. Apparently, the existence of an effective banking industry is vital to every economy and it encourages economic growth and development via its role in financial interdiction of funds supplies to deficit economic units. This stimulates international trade, investment economic growth as well employment growth as well as employment.

Monetary policy is one of the steps taken by every economy to make the banking sector effective. Monetary and banking policies are the sole responsibilities of monetary authority, which comprises of The CBN for the initiation, implementation and articulation of monetary system. The CBN carried out these duties on behalf of the federal government according to CBN decree 21 of 1991 and the banks and other financial institution BOFIA A4, of 1991 as amended. The banks proposal on monetary policy is subjective to the federal government.

The policies to be pursued is usually out in form of ‘’Audience’’ to all banks and other financial institutions. The guideline are general in operation within a fiscal year but could be amended on the course of the year. The CBN is equally empowered to direct the activities of the financial institutions in other to carry out certain duties in pursuit of approved monetary policy of which penalties are prescribed for non-compliance with specific provision of the guidelines.

Monetary policy affects financial and economic activities over the year. In other to appreciate the effects of monetary policy on the banking industry, it would be wise to move a review of changing views of monetary influence. Usually when the quantity of money changes in relation to financial activities as viewed by FISHER (1932). Fisher, take other neoclassical writer who held the view that in short run, money influences real cash balances. According to him, when the money stock increases, example;

An increase commodity prices since output and velocity were fixes initially. He assumed that a rise in commodity prices would exceed the increase in interest rate which was regarded as a component of a firms operating cost. In the whole analysis, rise in commodity prices will lead to an increase in a firm’s profit, demand, money stock and deposit which will eventually lead to a further rise in investment and commodity price. The excess reserved for lending will decline with interest rate, which was stocky earlier.

In the analysis of long-term transmission of monetary influence, Fisher replaced Interest-Investment channel with ‘’Real Cash Balance’’. He noted that when wealth rises due to rise in money stock, people tend to reduce their cash balances by purchasing goods and service. Since the velocity (v) and output (y) in Fishers equation of exchange (MVPT) is fixed, the risen money stock (M) cannot lead to increased holding of goods and services but will lead to decline in prices level (P). Keynes (1936) accepted the change in money supply relative has both substitution and effect and considered investment to be quite responsive to interest rates.

Keynes recommended price induce wealth effects, (i.e. change in wealth due to change in yields). There are ranging accounts by his interpreters about the extent he integrates them in his general theory. Hence subsequent write to Keynes (i.e. Keynesian or post Keynesian regards the cost of capital (interest rate) as the main process by which changes in money stock influence the economy. Thus, the change in volume of money alters the rate of interest. Usually approximated by the long-term government bound rate, which affects investment and consumption. Thus, the link between wealth of private sector and real sectors and consumption was analyzed by Piguo (1974) and Patikin (1951) in form of ‘’real cash balance effect’’ According to them changes in quantities of money would affect aggregate demand even if they did not alter interest rate.

On the other hand, credit rationing channel of monetary influence explained how financial interdiction, would be controlled by the market forces so as to ration the supply of credit by non-price mechanism. Thus, an expansionary monetary policy would raise the force of equity (i.e. reduce the yield on equities). The margin between the market evaluation and cost of reproducing the existing capital goods will stimulate new investment over those goods. The non-monetarist argued that monetary policy is as effective as fiscal policy as to determine total spending in the economy in spite of their differences. It holds the following views:

Movement in quantity of money is the most reliable measure of monetary value. Monetary authority can detect the movement in the stock of money over time and business cycle. Changes in stock of money are the primary determination of total spending as emphasized on Owen’s economic stabilization program. Monetary impulse is transmitted to real economy through an active price process or profit adjustment process which affect many financial and real antes.

1.2 Statement Of Problem

Investigation revealed that the banking sector continued to be underdeveloped and insufficient in terms of the quantity, caliber, and range of services provided even after the Central Bank of Nigeria (CBN) was established in 1958. Monetary management was adopted by the banking sector as a result of the CBN's establishment.

In the unlikely event that an analyst is itching to criticize the CBN for its subpar execution of monetary policy. In defense of the CBN, Ogwuma (1994:362) states that "a less than objective appraisal of the CBN's role in the Nigerian economy could interpret the adverse macro-economic trend as evidence of CBN failure."

1.3 Aim and Objectives of the Study

The aim of the study is to Econometrically Analyze the Monetary Policy on the Economy of Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To identify the basic effects of monetary policy in order to achieve a sound financial system;
2. To examine CBN monetary policy strategies; and
3. To identify the best policy measure for economic stability.

1.4 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• What are the basic effects of monetary policy in order to achieve a sound financial system?
• What are the CBN monetary policy strategies?
• What is the best policy measure for economic stability?

1.5 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: Variation in monetary policy does not significantly affect output growth.
• H1: Variation in monetary policy significantly affect output growth

1.6 Significant of the Study

The important of this study cannot be over emphasizes. It will serve as a useful material to the monetary authority, bank management and staff, customers, depositors, students and indeed the entire economy. Never the less, it will add to the volume of studies on the regards. The report shall be useful in ensuring both monetary stability and a sound, safe and profitable banking environment which will facilitate the pace for the economic growth and development in Nigeria.

1.7 Scope of the Study

Although there exist many factors affecting the operation of or the performance of the banking industry, this study focuses on the impacts of monetary policy on the performance of the banking industry.

1.8 Limitations of the Study

During the course of this study, there were some problems encountered which stood as limitations to the research work. Some of the limitations include:

1. Time Constraint:

   The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.

2. Financial Constraint:

   Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

3. Initial Cooperation Delay from Respondents:

   A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.

1.9 Definition Of Terms

Banking Industry:

These refers to the total number of banks and other financial institution who performs banking function such as acceptance of deposits. Issuing of credits/loan and keeping of valuables. Such banks include; Merchant Banks and Development Banks etc. The banking industry also consists of the monetary authorities such as Central Bank of Nigeria and other federal bodies whose duty includes the regulation of the economy.

Insurance Bank:

This implies those banks whose risk are insured with Nigeria Deposit Insurance Commission (NDIC).

Bank Distress:

This is the period in the banking industry when they cannot be able to meet up its target such as; objectives, dividends, staff remuneration in the economy as a whole. In this period, a bank is said to be in the period of solvency, i.e. a period when its debt ratio are high.