THE IMPACT OF MONETARY POLICY ON BALANCE OF PAYMENT IN NIGERIA (ECONOMICS PROJECT TOPICS AND MATERIALS)
CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
The monetary approach to balance of payments explains the elimination of payments disequilibrium in terms of factors bringing the demand and supply of money into equality. It treats the supply of money as endogenous by assuming a feedback from the balance of payments through changes in international reserve to changes in the monetary liabilities of the central bank and government. One important question of monetary policy is the extent to which the monetary authority of an open economy can affect the price level or the other arguments of the demand for money, such as the level of real output and the interest rate. If it were the case that these could not be changed, then any increase in monetary liabilities of the authority would be met by an equal and offsetting outflow of international reserve (or an equi-proportionate rise in the price of home goods and foreign exchange), and one would have to argue that monetary policy had no influence on the real response of the system. A second purpose of this research work is to clarify the effects of external shocks on the balance of payments. The simple monetarist model may provide an incorrect answer to the question. “What is the impact effect of an increase in particular world prices on the balance of payments of a small country?” The simple model (monetarist model) tells us that the balance of payments will temporarily improve as the higher prices produce an increase in the demand for stock of money. But we shall see that the answer is far more complex – indeed the effects on balance of payments depends on whether it is import or export prices that have risen and on a more traditional consideration of elasticity of demand (George and James, 1978). The monetary approach focuses on the supply and demand of money and the money supply process. The monetary approach hypothesizes that the balance of payment and exchange rate movement result from changes in money supply and demand. Consider what happens if the Central Bank domestic currency money supply exceeds money demand. There is pressure for the domestic currency to depreciate.
1.1 BACKGROUND OF THE STUDY
The monetary approach to balance of payments explains the elimination of payments disequilibrium in terms of factors bringing the demand and supply of money into equality. It treats the supply of money as endogenous by assuming a feedback from the balance of payments through changes in international reserve to changes in the monetary liabilities of the central bank and government. One important question of monetary policy is the extent to which the monetary authority of an open economy can affect the price level or the other arguments of the demand for money, such as the level of real output and the interest rate. If it were the case that these could not be changed, then any increase in monetary liabilities of the authority would be met by an equal and offsetting outflow of international reserve (or an equi-proportionate rise in the price of home goods and foreign exchange), and one would have to argue that monetary policy had no influence on the real response of the system. A second purpose of this research work is to clarify the effects of external shocks on the balance of payments. The simple monetarist model may provide an incorrect answer to the question. “What is the impact effect of an increase in particular world prices on the balance of payments of a small country?” The simple model (monetarist model) tells us that the balance of payments will temporarily improve as the higher prices produce an increase in the demand for stock of money. But we shall see that the answer is far more complex – indeed the effects on balance of payments depends on whether it is import or export prices that have risen and on a more traditional consideration of elasticity of demand (George and James, 1978). The monetary approach focuses on the supply and demand of money and the money supply process. The monetary approach hypothesizes that the balance of payment and exchange rate movement result from changes in money supply and demand. Consider what happens if the Central Bank domestic currency money supply exceeds money demand. There is pressure for the domestic currency to depreciate.
