THE EFFECTIVENESS OF MONETARY POLICY IN THE NIGERIAN FINANCIAL MARKETS 1970 - 1994
THE EFFECTIVENESS OF MONETARY POLICY IN THE NIGERIAN FINANCIAL MARKETS 1970 - 1994
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Date
1997-07
Authors
ABU, MICHAEL MAJU
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Abstract
The ability of the monetary authorities of a country especially the developing
countries (Nigeria inclusive) to tackle the issues of monetary policy effectively is one of
the strong determinants of these policy makers' ability to manage the economy
effectively. Therefore, issues of monetary policy and its effectiveness have in the past
been analyzed by many researchers and academicians in the field of economics. From
the background of the Nigerian monetary policy, this country has been adapting the so
called supply-leading financial development - a policy that is expected to encourage the
development of financial institutions, especially the money and capital markets so as to
inculcate the banking habits into the people. By so doing, the financial markets should
develop to enable the development of monetary policy tools for the effective use. The
policy markers in this regard concentrated on the development of the financial markets
through the introduction of many development banking institutions and persuading
commercial banks to open up branches in rural areas.
Since the inception of the CBN therefore, the monetary policy issues were
characterised by liberal and tight monetary restraints of the policy makers before the
introduction of the Structural Adjustment Programme (SAP) in 1986. The SAP opened
ways for the monetary authorities to introduce varieties of policies needed for the
effective management of the Nigerian economy. Some of the major changes introduced
were the floating of the Naira beginning from the SAP period. Various policy measures
were introduced to enable the Naira find its commensurate level within the existing
Nigerian economic situation.
To complement the supply-leading financial development policy of Nigeria, the
then government of President Babangida introduced the people's bank, and community
bank etc. for the development of the financial system.
Interest rates deregulation was a major policy of the monetary authorities tool
which was/is part of the authorities' SAP policy. The deregulation was meant to curtail
the liquid in the economy which resulted into an inflationary trend that was beyond the
control of the authorities. To worsen the situation, the deregulation does not favour
savings mobilisation as a result of higher yields from other financial assets other than
interest rates.
Moreso, the existence of the Informal Financial Sector (IFS) had rendered some
monetary policy tools ineffective. The IFS had resulted in money circulating outside the
banking system thereby making it difficult for the liquidity mop-up to be effective except
through the use of government expenditures.
It was discovered that as long as the financial markets are developing, policy tools
especially the indirect tools are not effective.
That the monetary authorities are not responding quickly to stimuli created by
ineffectiveness of monetary policy. It took them much time to identify the problems
while the problems take much time to be tackled. The authorities therefore should be
extra-vigilant in the area of monetary policy lags.
Policy towards managing inflation should be intensified. By so doing, the public
will bring about confidence in the financial markets. Also, the banking habit should be
expected to improve the effective management of exchange rate that reduces the rate of
inflation and increases the effectiveness of monetary policy.
In summary, the use of regression analysis shows that there is a positive
relationship between interest rates and borrowing. This therefore means that interest rate
fluctuations is not a strong tool for controlling credit in the economy. This may be due
to expected inflation in Nigeria today.
Description
A THESIS SUBMITTED TO THE POSTGRADUATE SCHOOL,
AHMADU BELLO UNIVERSITY, ZARIA, IN PARTIAL
FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE (M.SC) IN ECONOMICS.
DEPARTMENT OF ECONOMICS,
FACULTY OF SOCIAL SCIENCES,
AHMADU BELLO UNIVERSITY, ZARIA.
JULY, 1997
Keywords
EFFECTIVENESS,, MONETARY,, POLICY,, NIGERIAN,, FINANCIAL MARKETS