CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Monetary policy is the process by which monetary authority of a country

controls the supply of the money that is monetary stock often targeting a rate of

interest for the purpose of promoting economic growth and stability.

Monetary policy measures are monetary management put in place by the

government through the central bank. These measures rely on the control of

monetary stocks that is supply of money in order to influence board macro-

economic objectives which includes price stability high level of em*loyment

sustainable economic growth and balance of payment equilibrium. These board

objectives are achieved through the use of appropriate instrument depending on

which objective the policy formulated want to achieved and also on the level of

development on the economy.

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In the application of monetary policy measures as instrument of

stabilization instrument of monetary policy are determined by the nature of the

problems to be solved and by this environment in which these problems exist.

They are broadly two categories of these instruments VIZ- indirect and direct

instruments. INDIRECT INSTRUMENT are usually used in the market based on

economic where the quality of money stock can affected through the relationship

between supply and resume money as well as the ability of the monetary authority

to influence the creation of reserved.

The reserved and hence money supply can be affected through the following

ways.

1. Deposit ratio/change in reserve.

2. Change in discount rate.

3. Interest rate change.

4. Engaging in an open market operation.

In an underdeveloped financial institution the instrument of monetary

management is largely limited to direct measure which set monetary and credit

target at desired levels. The major DIRECT control measure is direct investment

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regulation however quantitative ceiling on overall credit operation is also used.

These instruments of monetary policy are applied in the achievement of varied

objectives.

1.2 STATEMENT OF THE PROBLEMS

The Nigeria economy has encountered the problem of disequilibrium

inability to mobilize domestic savings and unsatisfactory expansion of domestic

output. These problems have consistently and presently done severe damage to

Nigeria economy; but most strikingly these problems have continued to play the

economy unabated that is the economy is becoming less strong. It is against the

background that the problem of this study has been identified and they are as

follows.

1. Are monetary policy measures effective as instrument of economic

stabilization?

1.3 STATEMENT OF OBJECTIVES

The objectives of the study are:

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i. To analyze the various monetary policy objectives and instrument for the

period.

ii. To ascertain the level of success of policy measures against desired objects.

iii. To identify the factors that tends to hinder the full attainment of desired

objectives.

iv. To recommend the appropriate policy measures for the achievement of

specific objectives as well as recommend solution to problem that hinders

the full attachment of such objectives.

1.4 STATEMENT OF HYPOTHESISs

The following hypothesis is been formulated to guide the study.

H

0

: Monetary policy measures have no impact on the economic stabilization in

Nigeria.

H

1

: Monetary policy measures have impact on the economic stabilization in

Nigeria

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1.5 SIGNIFICANCE OF THE STUDY

These researches provide insight into monetary policy measures as an

instrument of economic stabilization and will therefore be of valuable use to the

following set of people.

i. To student it will provide a compliment to the fair existing text on monetary

policy and economic stabilization.

ii. To bankers it will also find a valuable tool toward analyzing the effect of

government action on their activities whether it is valuable or not.

iii. To investors it will serve as a guideline on the effect of monetary policy on

various sectors of the economy in which their fund can be invested.

iv. To the ordinary reader this work will serves as an open eye and a valuable

store of knowledge.

1.6 SCOPE AND LIMITATION OF THE STUDY

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This research work covers the monetary policies from (1980 - 2010). This

study will cover the relationship between the individual who would wish to know

about the country’s economic state and it is hoped that it will go a long way to

solve some of the economic problems as regards to monetary policies and its

measure as an instrument of economic stabilization.

1.7 DEFINITION OF TERMS

Monetary stock: This is the amount of money in circulation at any point in

time.

Reserve money: This refers to the amount of money banks are required to

maintain in their vaults.

Reserve ratio: This is the ratio of deposit that banks are required to maintain

with the central banks.

Discount rate: This is the rate at which the central bank make loan to

commercial bank as a leader of last resort. This term is used to qualify the central

bank when banks are cash trapped; it is the central bank that lends to them

whenever there is no alternative or liquidation.

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