THE EFFECTIVENESS OF MONETARY POLICY IN THE NIGERIAN FINANCIAL MARKETS 1970

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THE EFFECTIVENESS OF MONETARY POLICY IN THE NIGERIAN FINANCIAL MARKETS 1970 – 1994

Abstract:

The ability of the monetary authorities of a country especially the developing countries (Nigeria inclusive) to tackle the issues of monetary policy effectively is one of the strong determinants of these policy makers’ ability to manage the economy effectively. Therefore, issues of monetary policy and its effectiveness have in the past been analyzed by many researchers and academicians in the field of economics. From the background of the Nigerian monetary policy, this country has been adapting the so called supply-leading financial development – a policy that is expected to encourage the development of financial institutions, especially the money and capital markets so as to inculcate the banking habits into the people. By so doing, the financial markets should develop to enable the development of monetary policy tools for the effective use. The policy markers in this regard concentrated on the development of the financial markets through the introduction of many development banking institutions and persuading commercial banks to open up branches in rural areas. Since the inception of the CBN therefore, the monetary policy issues were characterised by liberal and tight monetary restraints of the policy makers before the introduction of the Structural Adjustment Programme (SAP) in 1986. The SAP opened ways for the monetary authorities to introduce varieties of policies needed for the effective management of the Nigerian economy. Some of the major changes introduced were the floating of the Naira beginning from the SAP period. Various policy measures were introduced to enable the Naira find its commensurate level within the existing Nigerian economic situation. To complement the supply-leading financial development policy of Nigeria, the then government of President Babangida introduced the people’s bank, and community bank etc. for the development of the financial system. Interest rates deregulation was a major policy of the monetary authorities tool which was/is part of the authorities’ SAP policy. The deregulation was meant to curtail the liquid in the economy which resulted into an inflationary trend that was beyond the control of the authorities. To worsen the situation, the deregulation does not favour savings mobilisation as a result of higher yields from other financial assets other than interest rates. Moreso, the existence of the Informal Financial Sector (IFS) had rendered some monetary policy tools ineffective. The IFS had resulted in money circulating outside the banking system thereby making it difficult for the liquidity mop-up to be effective except through the use of government expenditures. It was discovered that as long as the financial markets are developing, policy tools especially the indirect tools are not effective. That the monetary authorities are not responding quickly to stimuli created by ineffectiveness of monetary policy. It took them much time to identify the problems while the problems take much time to be tackled. The authorities therefore should be extra-vigilant in the area of monetary policy lags. Policy towards managing inflation should be intensified. By so doing, the public will bring about confidence in the financial markets. Also, the banking habit should be expected to improve the effective management of exchange rate that reduces the rate of inflation and increases the effectiveness of monetary policy. In summary, the use of regression analysis shows that there is a positive relationship between interest rates and borrowing. This therefore means that interest rate fluctuations is not a strong tool for controlling credit in the economy. This may be due to expected inflation in Nigeria today.

THE EFFECTIVENESS OF MONETARY POLICY IN THE NIGERIAN FINANCIAL MARKETS 1970 – 1994


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