MONETARY POLICY AND DEVELOPMENT FINAKaNGi THE CASE OF NIGERIA 1 9 5 0 – 1 9 66

  • Ms Word Format
  • 77 Pages
  • ₦3,000 | $25 | ₵60 | Ksh 2720
  • 1-5 Chapters

MONETARY POLICY AND DEVELOPMENT FINAKaNGi THE CASE OF NIGERIA 1 9 5 0 – 1 9 66

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.

MONETARY POLICY AND DEVELOPMENT FINAKaNGi THE CASE OF NIGERIA 1 9 5 0 – 1 9 66

0 Shares:
Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like