AN EVALUATION OF MONETARY POLICY INSTRUMENTS IN ACHIEVING MONETARY TARGETS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

Background of the Study

Because money can affect many economic variables that are important to the wellbeing of any economy, politicians and policy makers throughout the world care about the conduct of monetary policy- that is -the management of inflation rates, exchange rates and interest rates (Cukierman, Webb and Neyapti, 1992). The institution responsible for the conduct of a country’s monetary policy is the Central Bank. Monetary policy involves changes in the money supply or the choice central banks make regarding the money supply (Essien, 2005).

According to Essien (2002), it is how the monetary authorities choose to regulate and control the value, supply and cost of money in the economy in consonance with the expected level of economic activity. In choosing how best to regulate the money supply, the Central Bank makes use of monetary policy instruments to influence certain variables to achieve some intermediate goals, which would eventually lead to the ultimate objectives. The impacts of these policy instruments are translated to the economy through a process called transmission mechanism. De-Brouwer and Ericsson (1995) stresses that, the channel of transmission can be through either quantities or prices. He however, added that the policy could be transmitted through quantities via the monetary or credit channels and through prices via the interest rate, exchange rates or asset prices.

Monetary policy generally describes the actions taken by the central bank to influence monetary conditions in the economy with a view to achieving some defined macroeconomic goals.The mandate of the Central Bank of Nigeria (CBN) is derived from the CBN Act of 1958, as amended in 1991, 1993, 1997, 1998, 1999 and 2007.The Act charges the Bank with the overall control and administration of the monetary and financial sector policies of the Federal Government of Nigeria. The act statutorily mandates CBN to: issue legal tender currency in Nigeria; maintain external reserves to safeguard the international value of the legal tender currency; ensure monetary and price stability; promote a sound financial system in Nigeria; and act as banker and provide economic and financial advice to the Federal Government of Nigeria. The attainment of these goals would result into the country achieving both internal and external balance (Duravell and Ndungu’u, 1999). The essence of this study is to appraise the effectiveness of these monetary policy instruments in the management of Nigerian economy.

Statement of Problem

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