The Efficacy Of Monetary Policy As An Instrument For Controlling Inflation On Nigeria Economy

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The Efficacy Of Monetary Policy As An Instrument For Controlling Inflation On Nigeria Economy

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PROJECT TOPIC AND MATERIAL ON THE EFFICACY OF MONETARY POLICY AS AN INSTRUMENT FOR CONTROLLING INFLATION ON NIGERIA ECONOMY

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  • Name: The Efficacy Of Monetary Policy As An Instrument For Controlling Inflation On Nigeria Economy
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CHAPTER ONE

INTRODUCTION

The monetary policy of a country deals with control of money stock (liquidity) and therefore interest rate; in order to influence such macro economics variables as inflation, employment, balance of payment, aggregate output in the desired direction. There is no standard and ideal structure of monetary policy target and instrument, the instrument varies from country to country, depending on the size and stage of development of the financial market.

Over the years, the objective of monetary policy have remained the attainment of external balance. However emphasis on techniques/instrument to achieve this objective have change over the years. There have been two major phases in the pursuit of monetary policy namely, before and after 1986. the first phase placed emphasis on the direct monetary control, while the second relies on market mechanisms.

The monetary policy before 1986: the economic environment that guided monetary policy before 1986 was characterize by the dominate of the oil sector, the expanding role of the public sectors in the economy, and over dependence on the external sector. In order to maintain price stability and a healthy balance of payment position, monetary management depend on the use of direct monetary instrument such as credit ceiling, selective credit controls, administered interest and exchange rate, as well as the perception of cash reserve requirement and special deposits. The use of market – based instrument was not feasible at that point because of the underdeveloped nature of the financial market and the deliberate restraint of interest rate.

The most popular instrument of monetary policy was the insurance of credit rationing guideline, which primary set rate on the change for the component of commercial bank loan and advances to the private sector. Globally the problem of the inflationary is not peculiar to Nigeria, but it is a general problem confronting the majority, if not all countries of the world. The attempt by Nigerian government to attain a higher level of economic development at this period, generally lead to inflationary spiral in the country.

But whether inflation in Nigeria is due to monetary mismanagement on the part of the authorizes concerned or caused by interest structural deficiencies, still remain uncertain. Many factors have been identified to be responsible for inflationary pressure in the country. In a symposium of inflation in Nigeria held at university of Ibadan in 1983, November, most of the participant stressed on money supply, nature of government expenditure limitations in real output and the inflation (imported) as the major causes of inflation in Nigeria. In the case of formulating monetary policy, it is of paramount importance to specify objectives and also impossible to evaluate performances.

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