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THE EFFECTIVENESS OF MONETARY POLICY IN ACHIEVING PRICE
STABILITY IN NIGERIAN ECONOMY
ABSTRACT
This study is to examine the role of monetary policy in achieving
price stability in Nigerian economy and the objectives are as follows; to
examine the effectiveness of interest rate in achieving price stability in
Nigerian economy and also to examine the effectiveness of money supply in
achieving price stability.
The method applied in analyzing data for this work are based
on statistical at descriptive methods of analysis. (regression analysis was
used to analyses the respondents opinion. The finding is that there is
significant relationship interest rate and inflation.
Finally, a review of the Nigerian experience in monetary
management shows that the interventionist policy stance dominated monetary
management in the first two and half decades after which an era of
liberalization and deregulation of financial sector followed. Only a sustained
stable macroeconomic environment and a sound vibrant financial system can
propel the economy to achieve her millennium development goals.
CHAPTER ONE
1.0 INTRODUCTION
Research on effectiveness of monetary policy on economic
variables in Nigerian economy has for long been of interest to economist and
policy makers however, studies have been carried out on certain aspects of
economic variables. These studied are meager and in any case, not covering the
effectiveness of monetary policy of price stability in Nigeria, which now
necessitated this research work.
An issue which has occupied the minds of government for
decades is the effectiveness of monetary policy in influencing price stability
despite the lack of consensus among economist on how it actually works and on
magnitude of its effect on the economy, there is a remarkable strong agreement
that monetary policy has some measure of effect on the economy (Udegbunam 2003).
Monetary policy refers to the combination of measures
designed to regulate the value, supply and cost of money in an economy, in
consonance with the level of economic activity. It can be described as the art
of controlling the direction and movement of monetary and credit; facilities in
pursuance of stable price and economic growth In an economy (CBN, 1992).
In modern economics, the central bank is the authority with
the mandate to manipulating monetary policy instruments to achieving desired
macroeconomic objectives.
However, the primary objective of monetary policy cuts across
the mandates of most central banks is the maintenance of price stability which
is imperative to the attainment of sustainable growth is the focus of these
objectives which is specified in the CBN ACT of 1958.
- Issue of legal
currency notes and coins Maintain Nigeria external reserve
- To safeguard
the international value of the legal tender currency.
- Promoting
monetary stability and a sound financial system.
- Act as banker
and financial adviser to the federal government.
- Act as a
lender of last resort.
The pursuit of price stability invariably implies the
indirect pursuit of other objectives such as economic growth which can only
take place under conditions of price stability and allocative efficiency of the
financial markets, since inflation is generally considered as purely a monetary
phenomenon with significant cost to the economy. The primary goal of monetary
policy is to ensure that money supply is at a level that is consistent with the
growth target of real income such that non- inflationary growth will be
ensured. The pursuit of price stability through monetary policy therefore
encompasses all main areas in which the Central Bank can contribute towards
stabilizing the macroeconomic environment of the country.
1.1 STATEMENT OF THE
PROBLEM
Central bank of Nigeria (CBN) has been the sole player in
using monetary policy in achieving price stability. Central bank of Nigeria has
failed to achieve price stability due to the following:
- Lack of
consensus on what constitute price stability. For example, Shiratsuka (1997)
provides three definition of price stability as follows:
- A tolerable
target for inflation rate (if achieved assumes the attainment of the price
stability objective)
- Sustainable
growth underprice 'stability, implying price stability is achieved at the
inflation crate consistent with sustainable economic growth.
- Stability of
inflation expectation
- Moreso,
political instability has also been attributed to one of the problem
confronting central bank of Nigeria (CBN) in achieving price stability through
the use of monetary policy.
1.2 AIM AND
OBJECTIVES OF THE STUDY
The aim of this study is to carry out an indepth assessment
of the effectiveness of monetary policy in achieving price stability in Nigeria
economy. To this end, this study will investigate whether monetary policy will
help in achieving price stability.
The objectives of the study are as follows:
(a) To examine the
effectiveness of interest rate In achieving price stability in Nigeria economy
(b) To examine the
effectiveness of money supply In achieving price stability in Nigeria economy.
1.3 RESEARCH
QUESTIONS
(i) What will be
the effectiveness of interest rate ill achieving price stability in Nigeria
economy?
(ii) Will money
supply affect price stability ill Nigeria economy?
(iii) What will be
the effectiveness of interest rate and money supply in achieving price
stability in Nigeria economy?
(iv) What will be the
effectiveness of interest rate and money supply in achieving price stability in
Nigeria economy?
(v) Will
inflationary rate affect the economic growth of Nigeria economy?
(vi) What will be the
effectiveness of interest rate and money supply in achieving economic growth in
Nigeria economy?
1.4 SIGNIFICANCE OF
THE STUDY
To assess the effectiveness of monetary policy on price
stability in Nigeria economy. This study will reflect the effectiveness of
monetary policy towards economic growth.
The benefits to be derived from this study will assist the
policy makers to fine-tune strategies regarding monetary policy, how the money
should be circulated in economy. Other people that also benefits from this
research work include instructors, friends and colleagues in the field of
studies etc.
1.5 RESEARCH
HYPOTHESIS
The research hypothesis are as follows:
Hypothesis 1
Ho: There is no
significant difference between interest rate and inflation rate.
HA: There is
significance difference between interest rate and inflation rate.
Hypothesis 2
Ho: There is no
significance difference between money supply and inflation mate.
HA: There is
significance difference between money supply and inflation rate.
Hypothesis 3
Ho: There is no
significance difference between interest rate, money supply and inflation rate.
HA: There is
significance difference between interest rate, money supply and inflation rate.
1.6 RESEARCH
METHODOLOGY
The research methodology is specifically designed to carry
out effectiveness of monetary policy on price stability in Nigeria economy for
the past seventeen years (17 yrs): 1993-2009.
In this regard, the sources of data are basically based on
secondary sources of data collections. 'These are in the form of dailies,
statistical research findings such as: Central Bank of Nigeria (CBN) review etc
while regression (OLS) will be used to solve the collection data. The
methodology shall be descriptive and qualitative.
1.6.1 MODEL SPECIFICATIONS
Model I
Inf Rat = βo + 1 INTt + Et
INFt = Inflation Rate
Where βo - Constant
β1 = Parameter of the Equation
INTt = Interest Rate
Et = Error of Stochastic Term in Time T
1.8 SCOPE OF THE
STUDY
The scope of the study shall cover the effectiveness of
monetary policy in achieving price stability in Nigerian economy development
during the period 1993-2009.
1.9 LIMITATION OF
THE STUDY
The perceived limitations are as follows:
(a] The possibility
of getting the relevant data and the information for the purpose of the
research work.
(b) The availability
of fund for the research work is another constraint.
(c) Time constraint
is another limitation as the research work is combined with the academic work
in school as a final year student.
1.9 DEFINITION OF
TERMS
Money: It is anything that is general acceptable as a medium
of exchange, store of value.
Monetary policy: Is an instrument that Central Bank of
Nigeria uses to control the circulation and money supply in an economy.
Inflation: It is persistence Increase In price of goods and
services.
Stability: When there is a fixed price for particular goods
and services.
1.10 ORGANIZATION OF
THE STUDY
This study will be structured into five (5) chapters. Chapter
one will examine the introductory aspect of the study containing the background
of the study, statement of problem, aim and objectives, research questions,
research hypothesis, research methodology, significance of the study,
limitations of the study and organization of the study. Chapter two will
contain the review of relevant literatures. Chapter three will focus on the
structural analysis. Chapter four will examine the data analysis, presentation
and interpretation of the results findings. Chapter five will focus on the
summary, findings, recommendations and conclusion then the references.
REFERENCES
William J. McDonough, President Federal Reserve Bank of New York:
A
Framework Work for the Pursuit of Price
Stability.(2004)
Mr. B. A. Oke (1995): The Conduct of Monetary Policy by the
Central
Bank of Nigeria (CBN)
Central Bank of Nigeria (CBN) Annual Report and Statement of
Account
for the Year Ended 31st December, 2006.
Central Bank of Nigeria (CBN) Economic and Financial Review
Vo1.38 No.2: Inflation Targeting: A Monetary Policy Management Framework for
the Attainment of price Stability in Nigeria by Dr. O.A. Uchendu.
M. L. Jhigan (2002); Macro Economic Theory: 11th Edition
Revised
Edition.
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