CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

One of the major issues which have occupied the mind of government

for years is the impact of monetary policy as a tool for price stability in

Nigeria. Despite the lack consensus amongst the economy there is

remarkable strong agreement that monetary policy as an economy-

stabilizing measure in Nigeria refers to the persistence rise in the

general price level.

Monetary policy is one of the macroeconomic policies available for

managing the economy. It is however important today because its

effects on economic aggregates such as price output interest rates and

exchange rates. In most countries the central bank is saddled with the

responsibility of conducting monetary policy. In the case of Nigeria the

responsibility entirely lies with the Central Bank of Nigeria (CBN). The

discretionary control of the money stock by the monetary authority

involves the expansion and contraction of money influencing interest

rate to make money cheaper or more expensive depending on the

prevailing economic situation.

1.2 STATEMENT OF THE PROBLEM

The monetary policy implemented in the economy over the past years

has been detrimental and inconsistent with developmental needs of the

economy (Apata J.T 2007). This concern has exerted pressures on the

monetary authorities in Nigeria to re-examine and re-evaluate their

monetary policies with the view of finding possible solutions. As a result

of this the Structural Adjustment Programme (SAP) as introduced in

Nigeria in 1986 in order to correct the structural imbalances in the

economy and to liberalize the financial system.

Despite various actions used by the monetary authorities in

administering monetary policy in Nigeria there are still limits to the

effectiveness of monetary policy. There has been a wide discrepancy

between target and outcome due to the fact that the central bank has

not been able to achieve the various objectives it set out for itself. For

instance there has been a problem hitting inflation target. The

inflation target in 2008 was 7% but the performance was about 19%.

Nigeria needs an effective efficient sound and consistent monetary

policy that has a positive effect on interest rate employment and real

output so as to minimize the economic problems disturbing Nigeria as a

developing country

1.3 RESEARCH QUESTIONS

What is the effect of monetary policy on price stability in Nigeria?

To what extent do the instruments of monetary policy control

inflation in Nigeria?

What are the contributions of monetary policy towards developing

Nigeria?

1.4 OBJECTIVES OF THE STUDY

This study seeks to achieve the following objectives;

I. To determine the impact of monetary policy on inflation in

Nigeria.

II. To empirically examine the effectiveness of monetary policy on

economic stability in Nigeria.

III. To analyze the contributions of monetary policy towards

promoting growth and development of the Nigerian economy.

1.5 RESEARCH HYPOTHESIS

The hypothesis to be tested in the course of this research work is stated

below;

H

1

= Monetary policy has significant impact on inflation in Nigeria.

H

2

= Monetary policy has no significant impact on inflation in Nigeria.

1.6 SIGNIFICANCE O THE STUDY

This study is significant in the following ways;

I. It would provide an objective view of the effectiveness of the

monetary policy in Nigeria.

II. It would provide an economic basis upon which to examine the

effect of monetary policy on the Nigerian economy.

III. It would provide policy recommendations to the policy makers

on ways to make the Nigeria economy vibrant through the

monetary policy.

1.7 SCOPE OF THE STUDY / LIMITATION OF THE STUDY

This study will focus on major growth and development components

which are vital parts of monetary policy. The study will also empirically

examine the effectiveness of monetary policy in the Nigerian economy.

Factors that affect smooth execution of the project include inadequate

finance and short time.