1.1 Introduction
Monetary policy is defined as the deliberate regulation of the money supply, credit, and interest rates by a country’s central bank to achieve specific macroeconomic objectives, such as price stability, economic growth, and employment generation (Mishkin, 2019). in the context of Nigeria, monetary policy is primarily implemented by the Central Bank of Nigeria (CBN) to manage inflation, stabilize the currency, and promote sustainable economic development (Sanusi, 2019). Over the years, Nigeria has faced numerous economic challenges, including high inflation rates, exchange rate volatility, and insufficient access to credit for the private sector (Ogunleye, 2021). On the other hand, strategic interventions by the CBN, such as adjustments in interest rates, liquidity management operations, and development of regulatory frameworks, have contributed to periods of economic stabilization and growth (Eme & Okoro, 2022).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of the Study
Historically, monetary policy in Nigeria is closely linked to the evolution of the country’s financial system and its economic development strategies. According to Sanusi (2019), monetary policy in Nigeria formally began with the establishment of the Central Bank of Nigeria (CBN) in 1958, following the enactment of the Central Bank of Nigeria Act, which provided the legal framework for regulating money supply, credit, and banking operations. The primary objective of the early monetary policy was to ensure currency stability and maintain public confidence in the banking system. During the 1960s, Nigeria adopted monetary policy measures aimed at supporting the post-independence economic development plans, particularly through credit allocation to critical sectors such as agriculture and infrastructure (Akinbobola, 2020). The First National Development Plan (1962–1968) relied heavily on the CBN’s capacity to influence lending rates and direct credit towards priority sectors to stimulate growth. However, monetary instruments at this stage were largely rudimentary, with a primary focus on controlling liquidity rather than actively fostering broad-based economic development.
Monetary policy is a fundamental tool used by governments and central banks to regulate the economy, manage inflation, stabilize the currency, and promote growth. According to Mishkin (2019), monetary policy is defined as the deliberate manipulation of the money supply and credit conditions to achieve specific macroeconomic objectives. In Nigeria, the Central Bank of Nigeria (CBN) is entrusted with the responsibility of implementing monetary policy, aiming to ensure price stability, encourage investment, and foster sustainable economic development (Sanusi, 2019).
Paul Flilbers (2004), define Monetary policy to be the central bank’s control of fie availability of credit in the economy to achieve the broad objectives of economic policy. It is a measure taken by the monetary authority of a country to influence directly or indirectly or both, the supply of money and credit to the economy and the structure of interest rate with a view to achieve economic stability which could be in form of” sustainable rate of economic growth and development, price stability, full employment and balance of payment equilibrium. The achievement of these stipulated objectives goes long way in enhancing the development of a nation. Controls can be exerted through the monetary system by operating oil such’ Aggregates as the money supply, the level and structure of interest rates, and other conditions affecting credit in the economy (Paul Flilbers, 2004).
Several scholars have reported that Nigeria’s economic environment is characterized by persistent inflation, exchange rate volatility, and limited access to credit, which hinder the effectiveness of monetary policy in achieving developmental objectives (Ogunleye, 2021). Eme and Okoro (2022) asserted that while the CBN has employed measures such as interest rate adjustments, liquidity management, and credit allocation strategies, challenges including high borrowing costs, insufficient financial intermediation, and structural deficiencies continue to constrain economic growth. Akinbobola (2020) stated that these persistent challenges make it difficult for monetary policy to fully translate into improvements in productive investment, employment generation, and poverty reduction. Moreover, scholars contend that monetary policy effectiveness is influenced by external and internal factors such as global oil price fluctuations, political instability, and fiscal policy inconsistencies (Eme & Okoro, 2022). On the other hand, reported data from the CBN and World Bank affirm that periods of strategic monetary interventions have contributed to economic stabilization, reduced inflationary pressures, and modest improvements in growth (CBN, 2023).
It is obvious that the attainment of the mention objectives required the use of certain economic policies which monetary policy is one of such policies. Proper developmental policies coupled with some set of targets formulated and well implemented will consequently reflects positive changes in the social, cultural, political and economic lives of the people. Meanwhile, for the purpose of this study, the use of monetary policy for the achievement of economic development shall be discussed extensively.
1.3 Statement of Problems
Investigation revealed that monetary policy in Nigeria is designed to ensure price stability, promote economic growth, and maintain a balance of payments. However, despite its objectives, monetary policy is often faced with challenges that limit its ability to stimulate sustainable development. High inflation is one major problem, as it reduces the purchasing power of citizens and creates uncertainty for businesses (Akinbobola, 2020). Rising borrowing costs over recent years have also constrained economic growth, making it difficult for firms to access affordable credit for expansion and investment (Ogunleye, 2021).
Furthermore, limited capital availability exacerbates the problem, as the financial system is not always efficient in channeling funds to productive sectors (Sanusi, 2019). On the other hand, the Central Bank of Nigeria has implemented various measures aimed at stabilizing the economy, such as adjustments to interest rates, liquidity management, and exchange rate policies. These policies have sometimes resulted in positive economic outcomes, including periods of growth and improved fiscal indicators (CBN, 2023). It is against this backdrop that this study seeks to examine the role of monetary policy as an instrument of development in Nigeria, focusing on its effectiveness in promoting economic stability, growth, and overall development.
1.4 Purpose of the Study
The purpose of this study is to examine how monetary policy is utilized as an instrument of economic development in Nigeria. It seeks to analyze the effectiveness of monetary interventions in achieving macroeconomic stability, and stimulating sustainable economic growth.
The study also intends to identify the challenges that hinder the full impact of monetary policy and provide recommendations that will enhance its contribution to national development.
1.4 Aim and Objectives of the Study
The aim of this study is to assess the role of monetary policy as an instrument of development in Nigeria. The specific objectives of this study are:
- To examine the effectiveness of monetary policy in controlling inflation and stabilizing the currency.
- To assess how monetary policy influences investment and credit availability for businesses and households.
- To evaluate the impact of monetary policy on economic growth in Nigeria.
- To identify the challenges affecting the implementation and success of monetary policy in Nigeria.
- To provide recommendations that will improve the developmental impact of monetary policy.
1.5 Research Questions
Based on the stated objectives, the study will address the following research questions:
- How does monetary policy impact economic growth in Nigeria?
- How effective is monetary policy in controlling inflation and stabilizing the Nigerian currency?
- In what ways does monetary policy influence investment and credit availability for businesses and households?
- What are the challenges affecting the implementation and success of monetary policy in Nigeria?
- What strategies will enhance the effectiveness of monetary policy in promoting national development?
1.6 Significance of the Study
It is believed that at the completion of the study, the findings will serve as a guide for policymakers in designing strategies that will strengthen the impact of monetary interventions. The study will also inform small and medium-sized enterprises (SMEs) on how monetary policies will impact their access to finance and growth opportunities.
Furthermore, this study will be significant to financial institutions and commercial banks as it will accentuate how monetary policy will affect credit availability, lending rates, and investment decisions, enabling these institutions to align their operations with national development goals. Small and medium-sized enterprises (SMEs) will also benefit, as the study will demonstrate how monetary policy will improve access to affordable finance and foster business expansion.
Academically, this study will contribute to the existing literature by providing insights into the historical and contemporary role of monetary policy in Nigeria. It will serve as a reference point for future researchers who will explore the relationship between monetary interventions and economic performance in developing economies.
1.7 Research Hypotheses
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is no significant relationship between Gross Domestic Product and monetary policy instruments.
- H1: There is a significant relationship between Gross Domestic Product and monetary policy instruments.
Hypothesis Two
- H0: There is no significant relationship between money supply and inflation rates.
- H1: There is a significant relationship between money supply and inflation rates.
1.8 Scope of the Study
The scope of this study is confined to the examination of monetary policy in Lagos State and its influence on economic development through the banking sector and SMEs.
1.9 Limitations of the Study
A study of this nature is bound to experience certain problems as such the constraints imposed on the research include:
- Time Constraints: A study of this nature needs relatively long time during which information for accurate or at least near accurate inference could be drawn. The period of the study was short, time posed as constraints to the research.
- Financial Constraints: The research would have extended the survey to other area at the empirical level, but limitation as included cost of transportation to the source of material and the cost of time setting of the already completed work.
- Response Bias: The study will involve surveys and interviews with cooperative managers and members. Response bias may occur if respondents provide socially desirable answers or if there is reluctance to disclose negative financial information due to privacy concerns or fear of repercussions.
1.10 Model Specification
Both multiple and simple regression analysis technique shall be used ill this research work to give testable approximation based on the specified models:
Model 1
- GDP = F(E, Ms, R)
- ai and a3 < 0 .
Where
- GDP = Gross Domestic Product
- Ms = Money Supply
- R = Interest Rate (Lending Rate)
- E = Exchange Rate
- And ao, ai, a2 and as are parameters and coefficients of individual variable.
- e = error term.
Model 2
- Inf = F(Ms) Inf = βo + β1Ms + e
Where
- bo and bi >0
- Inf = Inflation Rate.
- bo and bi are parameters to be estimated while
- e = error term.
1.11 Definition of Terms
Monetary Policy:
Monetary policy is the deliberate control of money supply and credit by the central bank to achieve specific macroeconomic objectives such as price stability, economic growth, and employment generation (Mishkin, 2019).
Inflation:
Inflation is the sustained increase in the general price level of goods and services over a period of time, which reduces the purchasing power of money (Akinbobola, 2020).
Economic Development:
Economic development is the process of improving the economic well-being and quality of life of a nation’s citizens through sustainable growth, employment generation, and income distribution (Eme & Okoro, 2022).
Central Bank of Nigeria (CBN):
The CBN is the apex monetary authority in Nigeria responsible for formulating and implementing monetary policies to ensure economic stability and growth (Sanusi, 2019).
Small and Medium Enterprises (SMEs):
SMEs are businesses whose operations are of moderate size in terms of capital investment, employees, and revenue, and they contribute significantly to economic growth and employment (Ogunleye, 2021).
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