ABSTRACT
Since the expositions of the key role of monetary policy in influencing macroeconomic objectives like economic growth, price stability and host of other objectives, monetary authorities are saddled with the responsibility of fashioning appropriate monetary policy instruments that can be effectively used to grow their economies. However, despite the various monetary measures or instruments adopted by the monetary authorities to enhance rapid and sustainable economic growth and given the prominence of monetary policy in macroeconomic management in Nigeria over the years, growth has not accelerated. Instead of growing, the country has witnessed relatively low and unstable economic growth, poor income redistribution and increased poverty level as represented by its per capita income. The perceived ineffectiveness of monetary policy impact can be submitted as ineffectiveness or failure of the instruments deployed – all things being equal. It was against this background, therefore, that this study sought to examine how; (i) effective the use of Treasury bill rate as (a proxy to Open Market Operation) has impacted on the growth of Nigeria’s Real Gross Domestic Product, (ii) the use of Broad Money Supply (M2) as a monetary tool has fared in stimulating the growth of Nigeria’s RGDP, (iii) Liquidity Ratio (Lr) has impacted on the growth of Nigeria’s RGDP, (iv) effective the use of Monetary Policy Rate (MPR) as a monetary instrument has impacted on the growth of Nigerian’s RGDP. Ex-post-facto research design was adopted. Time series data for 30-years period covering 1982 – 2011 were collated from secondary sources that included Central Bank of Nigeria published annual reports and statistical bulletin. Four hypotheses were formulated for the study and tested using a multiple regression model. Economic growth proxied by growth of Real Gross Domestic Product was adopted as the dependent variable, while the independent variable included Treasury Bill Rate (TBR), Broad Money Supply (M2), Liquidity Ratios (LR) and Monetary Policy Rate (MPR). Results show that (i) Treasury bill rate has a positive and significant impact on Nigeria’s RGDP, (ii) Broad Money Supply (M2) exhibited a negative and insignificant impact on Nigerian’s RGDP, (iii) Liquidity ratio has negative and insignificant impact on Nigerian’s RGDP and (iv) Monetary Policy Rate (MPR) has positive and significant impact on Nigeria’s RGDP. The policy implication arising from the findings is that the monetary policy instruments showed a mix result in terms of their impact on Nigeria’s RGDP. The study therefore recommends among others that Nigeria should adopt a macro mix of monetary, fiscal and exchange rate policies because of the relative weakness of the use of monetary policy alone in engendering economic growth.
TABLE OF CONTENTS
Title Page                                                                                                              i
Declaration                                                                                          ii
Approval                                                                                   iii
Dedication                                                                                            iv
Acknowledgements                                                                                      v
Abstract                                                                                                 vi
Table of Contents                                                                                                     viii
List of Tables                                                                                                 xi
List of Figures                                                                                                   xii
CHAPTER ONE: INTRODUCTIONÂ Â Â Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1Â Â Â Â Â Â Â Â Â Â Â Â Â
1.1   Background to the Study      –            –          1                                                   Â
1.2   Statement of the Problem                        –            –             4     Â
1.3   Objectives of the Study         –         –          –           –            –             6         Â
1.4   Research Questions              –          –            –            –             6Â
1.5   Research Hypothesis        –      –           –           –              7  Â
1.6Â Â Scope of the Study –Â Â Â Â Â Â Â Â Â –Â Â Â Â –Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â Â Â Â 7Â Â Â Â Â Â Â Â Â
1.7  Significance of the Study  –         –  –        –           –           –              7 Â
References           –         –           –          –        –          –           –              9
CHAPTER TWO: REVIEW OF RELATED LITERATUREÂ Â Â Â Â –Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â Â 12
2.1   Theoretical Review          –           –         –          –            –           –            12
2.1.1   Schools of Economic Thoughts on Monetary Policy                   12
2.1.1.1   Classical Approach    –         –         –       –            –           –             12
2.1.1.2   The Keynesian Approach      –      –          –            –           –            13
2.1.1.3   The Modern Approach          –         –          –            –           –             13
2.1.1.4   The Liquidity Theory            – –         –          –            –           –             14
2.1.2   Monetary Policy Transmission Mechanism   –        –             15
2.1.2.1   The Traditional Interest Rate Channel        –        –            15Â
2.1.2.2   The Exchange Rate Channel            –         –            – –             17
2.1.2.3   Other Assets Channel           –         –                –            –            17
2.1.2.3.1   Equity Price Channels (Tobin’s q Theory)          –    –            – 18
2.1.2.3.2   Wealth Effects           –        –       –   –           –          –            –             18
2.1.2.4   The Credit Channels    –         –          –           –          –            –             19
2.1.2.4.1   The Bank Lending Channel          – –          –          –            –             19
2.1.2.4.2   Balance Sheet Channel        –       –          –          –            –             19
2.1.3   Links between Monetary Policy and Economic Growth     –  -20
2.1.4   Monetary Transmission Mechanisms in Nigeria        –         – 21
2.1.4.1   Transmission Mechanism under the Direct Monetary Control 21
2.1.4.2 Transmission Mechanism under the Indirect Approach to Monetary Control 22
2.1.4.3   Challenges of Monetary Policy Transmission in Nigeria          23
2.1.5   Instruments of Monetary Policy in Nigeria              –     –           23
2.1.5.1   Era of Direct Control Instruments     –         24                                     Â
2.1.5.1.1   Moral suasion           –         –       –           –           –  24        Â
2.1.5.1.2   Selective Credit Control or Guidelines     –  –            –             25
2.1.5.2   Era of Indirect or Market Based Instruments       –           –           25
2.1.5.2.1Â Â Â Open Market Operations (OMO)Â Â Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â 26
2.1.5.2.1.1Â Â Â Auctioning of the Nigeria Treasury Bills (NTB)Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â 27
2.1.5.2.1.2   The Two-Way Quote NTB Trading        –         –                     27
2.1.5.2.1.3Â Â Â Reverse Repurchase Agreement (Reverse Repo)Â Â Â Â Â Â Â Â Â Â -28Â Â Â Â Â Â Â Â
2.1.5.2.1.4Â Â Â Repurchase Agreement (REPO)Â Â –Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â 29
2.1.5.2.2   Reserve Requirements         –      –         –         –           –           29    Â
2.1.5.2.2.1   Cash Reserve Requirement          –         –         –         –             30
2.1.5.2.2.2   Liquidity Ratio      –         –         –         –      –           –           30
2.1.5.2.3   Discount Window Operations        –         –         –          –          –  30Â
2.1.5.2.4   The CBN Standing Facilities          –                  –            –             31  Â
2.1.6   Implementation of Monetary Policy in Nigeria           –         –          33
2.2   Empirical Review            –   –         –         –          –            –             38
2.3   Summary             –          –         –         –         –          –            –             44
References                   –           –          –         –         –          –            –             46
CHAPTER THREE – RESEARCH METHODOLOGY      –            –             53
3.1   Introduction       –               –          –         –         –          –            –             53
3.2   Research Design        –          –          –         –         –          –           –             53
3.3   Nature and Sources of Data               –          –          –           –             52Â
3.4   Model Specification          –             –        –          –          –           –            52
3.5   Model Justification           –             –         –         –          –          –             55
3.6   Explanatory Variables          –          –         –          –         –          –             56
3.6.1 Dependent Variable              –          –         –           –         –           –            56
3.6.2 Independent Variable       –  –          –                –           –           56Â
3.6.3 Controlled Variable               –         –          –          –           –           57
3.7   Method of Analysis           –       –         –          –          –           –           59
References       –            –                –            –          –          –           –          60
CHAPTER FOURÂ Â PRESENTATION AND ANALYSIS OF DATAÂ Â Â –Â 63Â Â Â Â Â Â Â Â Â Â Â
4.1      Introduction       –           –   –            –             –            –           –          63
4.2      Presentation of Data      –       –            –             –             –           –          63
4.3      Test of Hypotheses        –         –            –             –             –           –          76
4.3.1   Test of Hypothesis one   –      –            –              –            –           –          76
4.3.2   Test of Hypothesis Two  –           –    – –            –          78    Â
4.3.3   Test of Hypothesis Three             —              –            –           –          80
4.3.4   Test of Hypothesis Four                        –            –          –           82
4.4      Discussion of Results              –              –            –          –           83
           References      –            –               –             –             –          –          86
CHAPTER FIVEÂ Â Â Â Â Â Â Â SUMMARY OF FINDINGS, CONCLUSION ANDÂ Â Â RECOMMENDATIONSÂ Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â 87
5.1      Introduction              –              –            –           –           –         87
5.2      Summary of Findings      –                  –            –           –           –         87     Â
5.3      Conclusion      –                   –              –            –            –          –         88 Â
5.4      Recommendations           – –              –            –           –          –         89
5.5      Contribution to Knowledge    –            –           –          –         90
           Bibliography   –              –               –             –            –         –         91
LIST OF TABLES
Table 4.1        Real Gross Domestic Product, Treasury bill Rate and Gross Domestic Product Growth Rate    –    –             –             –             –            61Â
Table 4.2        Real Gross Domestic Product, Broad Money Supply and Gross Domestic  Product Growth Rate      –             –             –           64        Â
Table 4.3        Real Gross Domestic Product, Liquidity Ratio and Gross Domestic Product Growth Rate                 –             –             –             –           67Â
Table 4.4        Real Gross Domestic Product, Monetary Policy Rate and Gross Domestic Product Growth Rate       –             –             –           71Â
Table 4.5  OLS Regression Result of Treasury bill Rate (TBR) on Real Gross Domestic Product (RGDP)           –            –             –             –             –           74Â
Table 4.6   OLS Regression Result of Broad Money Supply(M2) on Real Gross Domestic Product (RGDP)              –             –             –             –           76Â
Table 4.7    OLS Regression Result of Liquidity Ratio (LR) on Real Gross Domestic Product (RGDP)       –            –             –             –             –           78Â
Table 4.8Â Â Â OLS Regression Result of Monetary Policy Rate (MPR) on Real Gross Domestic Product (RGDP)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â Â Â –Â Â Â Â Â Â Â Â Â Â Â 79Â
LIST OF FIGURES
Figure 4.1       Multiple Line chart showing Treasury Bill Rate and Real Gross Domestic Product Growth Rate           Â
Figure 4.2       Multiple Line chart showing Real Gross Domestic Products, Broad Money Supply and Real Gross Domestic Product Growth Rate  67
Figure 4.3       Multiple Line chart showing Liquidity Ratios and Real Gross Domestic Product Growth Rate            –             –              –              –             70
Figure 4.4       Multiple Line chart showing  Monetary Policy Rate and Real Gross Domestic  Product Growth Rate                     –              – 74
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
One of the greatest challenges facing nations is how to achieve sustainable economic growth and development and formal articulation of how money affects economic growth dates back to the time of Adams Smith and later championed by the monetary economists (Adefeso and Mobolaji, 2010:13). This is because of the numerous benefits that growth confers. A few of the most important ones are; firstly, economic growth raises the general living standard of the population as measured by per capita national income; secondly, economic growth makes many kinds of income distribution easier to achieve; thirdly, economic growth enhances the time frame of accomplishing the basic necessities of man, for example shelter, food, clothing, etc, by a substantial majority of the population (Lipsey,1982:693).
Monetarists strongly believe that monetary policy exact greater impact on economic activity as unanticipated change in the stock of money affects output and growth i.e the stock of money must increase unexpectedly for central bank to promote growth (Omotor, 2007). Ezema (2009) defines monetary policy as a combination of policy actions taken by the central bank of a country to influence money supply, interest rate, availability and cost of credit in an economy. Monetary policy aims at achieving the broad objectives of commensurate economic growth rate and development of the national economy through specific objectives which include price stability, full employment, favorable balance of payment and others (Okwu,et.al.,2011;Nwankwo, 1991). It covers gamut of measures or combination of packages intended to influence or regulate the volume, prices as well as direction of money in the economy. Specifically, it permeates all the debonair efforts by the monetary authorities to control the money supply and credits conditions for the purpose of achieving diverse macroeconomic objectives (Ajie and Nenbee, 2010). Chamberlin and Yueh (2006:55) add that monetary policy – the act of controlling the supply or price of money – may exert a powerful influence over the economy.
Monetary policy can also be defined as the instruments at the disposal of the monetary authorities to influence the availability and cost of credit/money with the ultimate objective of achieving price stability. Depending on the mandate of the monetary authorities, the objectives of monetary policy may well go beyond price stability. More often than not, monetary authorities particularly in developing countries are saddled with a dual mandate – price stability and sustainable growth (Ibeabuchi, 2007). In such a situation, monetary policy is used to achieve both objectives (Aderibigbe, 1997:11 ). The apparent conflict between these views according to Fry (2000:128) is resolved if it can be established that monetary policy can be used to accomplish the goals of high employment and growth only if it maintains stable prices. In such a case, price stability becomes a necessary condition for sustained economic growth and, thus, no conflict between the two objectives, since they imply the same thing.
Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth, price stability and host of other objectives, monetary authorities are saddled with the responsibility of fashioning appropriate monetary policy instruments that can be effectively used to grow their economies (Nenbee, et. al, 2010). In the opinion of Bernanke and Lian (1998), the choice of the monetary instruments used for intervention by policy makers is the major determinant of the degree of impact on monetary aggregates and the ultimate objective of economic growth. In other word, the responsibility lies on the monetary authorities to evaluate and assess the effectiveness or ineffectiveness of the transmission mechanisms of its monetary instruments deployed and determines which one has greater and quicker impact on their ultimate objective amongst others. The transmission mechanism of monetary policy describes the channels or the processes through which monetary policy actions of the central bank impact on the ultimate objectives of inflation and output (Akhtar, 1997; Ajayi, 2007). Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending and firm balance sheets. Four main channels through which monetary policy influences the economy have been identified in the literature namely, interest rates (sometimes referred to as liquidity channel), exchange rate, other assets prices and credit (Peter, 2005).
In Nigeria, the Central Bank of Nigeria (CBN) is the sole monetary authority. Its core mandate is to promote monetary and price stability and evolve an efficient and reliable financial system through the application of appropriate monetary policy instruments and systemic surveillance. In order to ensure the realization of the goals of price stability and economic growth, the CBN deploys its monetary policy instruments in such a way as to ensure optimality in inflation and growth outcomes (CBN, 2010). Monetary policy complements other economic policies to achieve government’s overall macroeconomic objectives of internal balance and external viability (Adesoye, et. al., 2012).
The conduct of monetary policy in Nigeria has undergone several phases. Three of the phases are easily identified – the era of application of direct controls; the era of application of market instruments (or indirect controls), and the era of intense reform of strategy and institutions. The major objectives of policy has, however, remained unchanged, that is, price stability and sustainable growth of the economy (Omotor, 2007).While the objectives of monetary policy in the early 1970s were designed to deal with four main broad objectives, namely price stability, high rate of unemployment, sustainable economic growth and balance of payments, the approach of monetary policy implementation has evolved over the years from absolute reliance on direct controls in the 1970s and early 1980s to focus on the market based system of monetary control (Uchendu, 1996). Under direct controls, monetary management depended on the use of direct instruments, such as credit ceilings, selective credit controls, administrative fixing of interest rates and exchange rate as well as the prescription of cash reserve requirements. The main objective then was to ensure that funds were made available to the productive sectors of the economy such as agriculture and manufacturing at relatively cheap terms. Under this regime, monetary policy impulses through changes in interest, exchange rates and credit ceilings were expected to positively affect changes in output and prices through the credit channel. Achieving the objective of monetary policy under this approach was, however, hampered by excessive fiscal dominance and poor compliance with statutory directives by deposit money banks as operators continued to hide credit transactions in a way that prevented funds from flowing into the preferred sectors of the economy (Idowu, 2009).
As the financial markets deepened over time as a consequence of the economy wide macroeconomic reforms that commenced mid-1980s, the CBN started the process of shifting from the use of direct instruments to market-based instruments.(Sanusi, 2002). The most significant move in the new direction came in June 1993 when the Bank introduced OMO. The market-based tools include in addition to OMO, reserve requirements which specifies the proportion of a bank’s total deposit liabilities that should be kept with the central bank; and discount window operations under which the central bank performs the role of lender of last resort to the deposit money banks (Nnanna, 2001). Currently, OMO is the major instrument of monetary policy at the CBN. Other supporting instruments are discount window operations, moral suasion, foreign exchange sales/swaps and the standing facility introduced in December 2006 (CBN, 2006).
As a result of the increasing dynamism of the modern national economy resulting from financial liberalization and greater integration and interdependence of the monetary economies, there is need for continual research and assessment of the relevance and effectiveness of monetary instruments used in monetary management. This will enable policy makers ensure that there is no deviation from monetary targets and that the instrument accomplishes the ultimate goal which is the growth of the nation’s economy. It is as results of this need, amongst others that this study will examine the impact of monetary policy instruments on the economic growth of Nigeria.
