CHAPTER ONE

INTRODUCTION

1.1 Background to the Study
The Central Bank of Nigeria (CBN) role is achieved through the use of monetary policy that targeted towards the achievement of financial stability such as the achievement of full- employment equilibrium, rapid economic growth, price stability, and external balance. In the past, inflation targeting and exchange rate policy dominated
CBN's monetary policy focus because it was assumed to be the most essential instrument for achieving financial stability. The dominance of the oil sector, the expanding role of the public sector in the economy and over-dependence on the external sector were the main determinants of monetary policy before the era of structural adjustment programmes in 1986. In order to maintain price stability and a healthy balance of payments position, monetary management depended on the use of direct monetary policy instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, cash reserve requirements and special deposits. The underdeveloped nature of our financial market and the use of regulatory control on interest rates make it difficult to achieve macroeconomic stability in the country. Credit rationing guidelines, which set the rates of change for the components and aggregate commercial bank loans and advances to the private sector, were the main policy thrust of monetary policy before the era of deregulation. The emphasis on private sector allocation of bank credit in CBN guidelines through relatively low interest rates was to control inflation and stimulate
investment in the productive sectors.

Central Bank periodically imposes special deposits to reduce the amount of free
reserves and credit-creating capacity of the banks with specified minimum cash ratios for
the banks in the mid-1970s in respect of their total deposit liabilities. The cash ratios
were usually lower than those voluntarily maintained by the banks. This act as a restraint
on their credit operation Monetary policy is the action taken by the apex monetary
authority (CBN) to effect monetary and other financial conditions through influence over
the availability and cost of credit in pursuit of the broad objectives of sustainable growth
of output, price stability and a healthy balance of payments position. The discretionary
control of the money stock involves the expansion or contraction of money and
influencing interest rate to make money cheaper or more expensive depending on the
prevailing economic conditions and thrust of policy, instruments of monetary policy is
classified into two broad categories direct and indirect instruments. Under a system of
direct monetary control, the Central Bank uses some criteria to determine money, credit
and interest rate targets that would achieve the goals of economic policy. In a regime of
indirect monetary control, the monetary base (specifically bank reserves) is managed
while the market is left to determine interest rates and credit allocations.

Monetary policy is the amalgam of measures designed to regulate the value,
supply and cost of money in an economy, to stimulate productive economic activity in the
country. The objectives of monetary policy in most economies include price stability, maintenance of external balance, reduction of unemployment, growth in output, and
sustainable development (Folawewo and Osinubi, 2006). These are long run economic
growth measures that are necessary for the attainment of internal and external balance.
Price and exchange rate volatility, undermine the ability of policy makers to achieve
other laudable macroeconomic objectives which makes it difficult for monetary
authorities to achieve the role of money as a store of value, and thus discourage
investments and growth. This long run inverse relationship between inflation and
economic growth is replete in the literature. The achievement of price stability will create
a high degree of confidence among investors and the increasing desire on investors the
government ability to manage and control her economy effectively. The transmission
mechanism of monetary policy is less effective in an unstable and crisis ridden financial
thereby making it difficult for the achievement and maintenance of strong
macroeconomic fundamentals. This is because forecasting of market signals can be
achieved with a fair degree of accuracy in an era characterized by price stability. During
periods of high inflation, investors concentrate on short and medium term investment at
the expense of long term investment which is a prerequisite for economic growth and
development. Price stability is one of the major macroeconomic objectives in Nigeria.
Despite the various monetary policy regimes which have been adopted by the central
bank of Nigeria over the years, inflation still remain as a major threat to Nigeria
economic growth. High inflation volatility in Nigeria Since the early 1980's is a major challenge to policy makers, hence studies on inflation volatility and measure to reduce
has become inevitable among scholars.

There is a positive relationship between growth rate of Money supply and high
inflation rate. However, preceding the growth in money supply, some factors reflecting
the structural characteristics of the economy were observable. Some of these factors are
supply shocks in the form of changes in terms of trade, devaluation of currency, famine
etc. (Nigerian Economic and Financial Review, 2014, 4(1):20-32) Other factors
considered to be structural in nature such as reduction in oil revenue which have negative
impact on real income with serious distributional implications play important role in the
inflation spiral. An increase in nominal wage rate for workers calls for an increase in the
general price level of goods and services.

The growth rate of GDP in Nigeria for the past three decades has been poor. This
could be as a result of failure of the monetary policy in maintaining price stability. When
compared with other developing countries, its GDP was not significantly higher in the
year 2000 as it was 35 years before. The GDP growth rate recorded negative growth rate
of -0.3 percent in 1983, - 5.4 percent in 1984 and -5.1 percent in 1985 which was
inadequate to sustain a population growth rate of 2.8 percent, also in1991 a negative
growth rate of -0.8% was recorded. The 1990s witnessed an unstable growth rate of GDP.
However, the growth rate has been relatively high since 2001. Significant scholarly effort
have been concentrated on the impact of monetary policy on economic growth in Nigeria,
but the result has been inconsistent and controversial, some recorded positive growth on GDP while other recorded negative impact. The inflation volatility in growth process is a
major concern. This has created the avenue for further studies to contribute to knowledge
building. The rest of the paper is organized as follows: Section two is literature Review,
theoretical framework is taken up in section three. Methodology is treated in section four
Data sources is taken up in section five. Model estimation is contained in section six.
Analysis of data and interpretation of results is contained in section seven.
Recommendations for policy formulation and implementation are in section eight, while
section nine concludes the study. (Nigerian Economic and Financial Review, 2014).

1.2 Statement of the Problem

One of the major objectives of monetary policy in Nigeria is price stability. But
despite the various monetary regimes that have been adopted by the Central Bank of
Nigeria over the years, inflation still remains a major threat to Nigeria's industrial growth.
Nigeria has experienced high volatility in inflation rates. Since the early 1970's, there
have been four major episodes of high inflation, in excess of 30 percent. The growth of
money supply is correlated with the high inflation episodes because money growth was
often in excess of real industrial growth. The failure of the monetary policy in curbing
price instability has caused growth instability as Nigeria's record of development has
been very poor (Balogun, 2007).

Inadequate knowledge of the economic system can deter policy actions from
having the desired effects. Similarly, inadequate understanding of the consequences of
monetary policy would lead to misjudgment and would substantially increase the costs of achieving any given goal. In Nigeria, uncertainty about the transmission mechanism and
incomplete understanding of the system has remained a major challenge for monetary
policy (Uchendu, 2009). This is compounded by the existence of a vibrant informal
sector, which has ambiguous structures. Monetary policy in Nigeria is, therefore,
undermined and characterized by uncertainty and inadequate knowledge (by
policymakers and others) of the economy. These challenges are believed to contribute to
volatility and slow economic growth in Nigeria (Batini, 2004; Balogun, 2007).

1.3 Objectives of the Study

The board objective of this study is to determine the activities effect monetary
policy on economics growths in Nigerian for the period monetary policy 1980-2018.
Other specific objectives of the study are as:
i. Analyze the trend of monetary policy rate money supply exchange rate and
nominal growth in Nigeria.
ii. Determine the effect of policy rate, money supply and exchange rate on economic
growth in Nigeria.

1.4 Research Questions

i. How has monetary policy influenced output in Nigeria?
ii. To what extent has interest rate affected the economic growth in Nigeria?
iii. How does average price affected the level of output in Nigeria?

1.5 Hypotheses of the Study

HO: There is no significant relationship between money supply and the level of output.
H01: There is significant relationship between money supply and the level of output.

1.6 Significance of the Study

This study will give a clear insight on the effect of monetary policy on economic output
in Nigeria 1980-2018. It will be of help to any organization and the employee. The study
will be of help to others research which the study will serve as reference.

1.7 Scope of the Study

The main plan of this study is to examine the effect of monetary policy on
economic growth in Nigeria, also to determine the effect of money supply, inflationary
rate, and credit to the private sector, interest rate on credit, infrastructural development,
external debts and rice index on economic growth in Nigeria.

1.8 Operational Definition of Terms

Effect: Power to bring about a result

Monetary Policy: measures taken by the central bank and treasury to strengthen the
economy and minimize cyclical fluctuations through the availability and cost of credit,
budgetary and tax policies, and other financial factors and comprising credit control and
fiscal policy

Economic Growth: it is an increase in the capacity of an economy to produce goods and
services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation.

Monetary Policy Rate: The is the main monetary policy instruments available to central
banks are interest rate policy, i.e. setting (administered) interest rates directly, open
market operations, forward guidance and other communication activities, bank reserve
requirements, and re-lending and re-discount (including using the term repurchase
market.

Money Supply: It is the total amount of money in circulation or in existence in a
country.

Exchange Rate: The value of one currency for the purpose of conversion to another