THE EFFECTIVENESS OF MONETARY POLICY IN ACHIEVING PRICE STABILITY IN NIGERIAN ECONOMY

CHAPTER ONE

1.0     INTRODUCTION

Research on effectiveness of monetary policy on economic variables in Nigerian economy has for long been of interest to economist and policy makers however, studies have been carried out on certain aspects of economic variables. These studied are meager and in any case, not covering the effectiveness of monetary policy of price stability in Nigeria, which now necessitated this research work.

An issue which has occupied the minds of government for decades is the effectiveness of monetary policy in influencing price stability despite the lack of consensus among economist on how it actually works and on magnitude of its effect on the economy, there is a remarkable strong agreement that monetary policy has some measure of effect on the economy (Udegbunam 2003).

Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the level of economic activity. It can be described as the art of controlling the direction and movement of monetary and credit; facilities in pursuance of stable price and economic growth In an economy (CBN, 1992).

In modern economics, the central bank is the authority with the mandate to manipulating monetary policy instruments to achieving desired macroeconomic objectives.

However, the primary objective of monetary policy cuts across the mandates of most central banks is the maintenance of price stability which is imperative to the attainment of sustainable growth is the focus of these objectives which is specified in the CBN ACT of 1958.

-        Issue of legal currency notes and coins Maintain Nigeria external reserve

-        To safeguard the international value of the legal tender currency.

-        Promoting monetary stability and a sound financial system.

-        Act as banker and financial adviser to the federal government.

-        Act as a lender of last resort.

The pursuit of price stability invariably implies the indirect pursuit of other objectives such as economic growth which can only take place under conditions of price stability and allocative efficiency of the financial markets, since inflation is generally considered as purely a monetary phenomenon with significant cost to the economy. The primary goal of monetary policy is to ensure that money supply is at a level that is consistent with the growth target of real income such that non- inflationary growth will be ensured. The pursuit of price stability through monetary policy therefore encompasses all main areas in which the Central Bank can contribute towards stabilizing the macroeconomic environment of the country.

1.1    STATEMENT OF THE PROBLEM

Central bank of Nigeria (CBN) has been the sole player in using monetary policy in achieving price stability. Central bank of Nigeria has failed to achieve price stability due to the following:

-        Lack of consensus on what constitute price stability. For example, Shiratsuka (1997) provides three definition of price stability as follows:

-        A tolerable target for inflation rate (if achieved assumes the attainment of the price stability objective)

-        Sustainable growth underprice 'stability, implying price stability is achieved at the inflation crate consistent with sustainable economic growth.

-        Stability of inflation expectation

-        Moreso, political instability has also been attributed to one of the problem confronting central bank of Nigeria (CBN) in achieving price stability through the use of monetary policy.

1.2    AIM AND OBJECTIVES OF THE STUDY

The aim of this study is to carry out an indepth assessment of the effectiveness of monetary policy in achieving price stability in Nigeria economy. To this end, this study will investigate whether monetary policy will help in achieving price stability.

The objectives of the study are as follows:

(a)     To examine the effectiveness of interest rate In achieving price stability in Nigeria economy

(b)    To examine the effectiveness of money supply In achieving price stability in Nigeria economy.

1.3    RESEARCH QUESTIONS

(i)     What will be the effectiveness of interest rate ill achieving price stability in Nigeria economy?