MONETARY POLICY AND DEVELOPMENT FINAKaNGi THE CASE OF NIGERIA 1 9 5 0 - 1 9 66
MONETARY POLICY AND DEVELOPMENT FINAKaNGi THE CASE OF NIGERIA 1 9 5 0 - 1 9 66
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Date
1971-10
Authors
Ako, Ounnar Blornqvlst
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Abstract
This stud/ analyzes the monetary and financial system and its
interaction with the real economy for the case of Nigeria, 1950-1966.
Relatively simple tools from monetary and macro-economic theory are
applied in order to contribute to the understanding of the rolo of
monetary policy in the context of a low-income, partially monetized,
open economy with undeveloped financial markets, in which the fundamental
economic policy objective is to accelerate real economic growth.
The primacy of this objective implies the existence of strong
pressure on the policy-makers to conduct an expansionary monetary
policy for the purpose of generating a high rate of development expenditure.
The study investigates whether past experience in Nigeria is
consistent with the view that such a policy will significantly
accelerate real growth. Before 1959, the supply of currency was
regulated through the operation of the West African Currency Board,
which held 100% sterling reserves against its liabilities. The
monetary system's contribution to development financing was therefore
limited to the growth in domestic credit of commercial banks. After
its foundation in 1959 the Control Bank extended increasing amounts
of domestic credit, and commercial bank credit continued to grow
rapidly. The resulting expansionary impact on the money supply,
however, was partly offset by the rapid decline in foreign assets of
the monetary system. This indicates the limited extent to which
domestic credit expansion can take place if it is desired to maintain
balance-of-payments equilibrium at a fixed exchange rate and a stable
level of foreign reserves. This hypothesis is also consistent with
the results of projections of the Nigerian economy which illustrate
the consequences of differont assumed monetary policies; the projections
are based on estimated equations describing the determination of the
demand for money and the level of imports.
In spite of this, a strongly expansionary monetary policy might
nevertheless be considered worthwhile if it had a favorable onough
impact on real growth. The a priori discussion, however, givc3 little
support to the hypothesis that inflation would succeed in stimulating
non-monetary savings and capital formation; it is further concluded
that the increase in savings through increased accumulation of money
balances would be relatively small, due to the low money/income ratio.
Tho regression results are consistent with these conclusions.
Possible techniques of monetary policy are extensively discussed.
Due to the narrow market for government securities tho Central Bank
must have a certain degree of responsibility for the stabilisation of
government securities prices. Therefore, domestic borrowing requirements
of the government becomes a crucial parameter for monotary policy with
the consequence being strong interdependence between monotary and
fiscal policy. Following Friedman, the question of rules vs.
discretion in monetary policy is considered with the conclusion that
there is a strong case in favor of ruloa. However, in an open economy
with fixed exchange rates, it is appropriate to consider domestic
credit rather than the stock of money, as the control variable. On
the basis of the performance of such a rule in the projection experiments,
it 1B concluded that its adoption in Nigeria can be tentatively
recommended.
Finally, the oligopolistic character of the banking system is
discussed, and the choice of techniques of monetary policy is considered
in terms of their effects on competition and efficiency in the monetary
and financial system.
Description
A DISSERTATION
PRESENTED TO THE
FACULTY OF PRINCETON UNIVERSITY IN CANDIDACY FOR THE DEGREE
OF DOCTOR OF PHILOSOPHY
RECOMMENDED FOR ACCEPTANCE BY THE
DEPARTMENT OF
ECONOMICS
Keywords
MONETARY,, POLICY,, DEVELOPMENT,, CASE,, NIGERIA