Monetary Policy in Nigeria 1980- 2008

Topics: Monetary policy, Money supply, Inflation Pages: 19 (6282 words) Published: July 17, 2010

Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payments. However, emphasis on techniques/instruments to achieve those objectives have changed over the years. There have been two major phases in the pursuit of monetary policy, namely, before and after 1986. The first phase placed emphasis on direct monetary controls, while the second relies on market mechanisms. Overall, the socio-economic and political milieu, including the legal framework under which the Central Bank of Nigeria has operated, was found to be the critical factor that influenced the outcome of monetary policy. Specifically, the existence of fiscal dominance, a persistent liquidity overhang, an oligopolistic banking system and dualistic financial markets are major systemic factors that have undermined the efficacy of monetary policy in Nigeria. Generally, both fiscal and monetary policies seek at achieving relative macroeconomic stability. Over the year, two issues have been subjects of debate in this regard. First is the superiority of each of these policies in the achievement of macroeconomic stability. While the Keynesians argued that fiscal policy is more potent than monetary policy, the monetarists led by Milton Friedman on the other hand believed the other way round.

Monetary policy is the process by which the central bank or monetary authority of a country controls the supply of money, often targeting a rate of interest. Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy. These goals usually include stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy rapidly, and a contractionary policy decreases the total money supply or increases it only slowly. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.

Monetary Policy before 1986
The economic environment that guided monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the public sector in the economy and over-dependence on the external sector. In order to maintain price stability and a healthy balance of payments position, monetary management depended on the use of direct monetary instruments such as credit ceilings, selective credit controls, administered interest and exchange rates, as well as the prescription of cash reserve requirements and special deposits. The use of market-based instruments was not feasible at that point because of the underdeveloped nature of the financial markets and the deliberate restraint on interest rates. The most popular instrument...

References: * Monetary Policy and Macroeconomic Instability in Nigeria : A Rational Expectation Approach [Abiodun Oluwole Folawewo and Tokunbo Simbowale Osinubi]
[DR O. J. Nnanna]
* "B.M. Friedman, "Monetary Policy," Abstract.". International Encyclopaedia of the Social & Behavioural Sciences. 2001. pp. 9976–9984.
* Rogoff, Kenneth, 1985. "The Optimal Commitment to an Intermediate Monetary Target", Quarterly Journal of Economics 100, pp. 1169–1189
* Forder, James (December 2004). ""Credibility" in Context: Do Central Bankers and Economists Interpret the Term Differently?" (pdf). Econ Journals Watch.
* "Bank of England founded 1694". BBC. March 31, 2006.
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