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TRANSPARENCY IN
MONETRY AND
FINANCIAL
POLICIES:
THE NIGERIA
PERSPECTIVE.
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BY
..
AKP/WRR/BMG/BUS/HND2007/.
A PROJECT WRITTEN IN DEPARTMENT OF
BUSINESS ADMINISTRATION, SCHOOL OF
BUSINESS STUDIES COLLEGE OF
ACCOUNTANCY AND COMPUTER TECHNOLOGY.
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IN PARTIAL FULFILMENT OF THE REQUIREMENT
FOR THE AWARD OF THE HIGHER NATIONAL
DIPLOMA IN BUSINESS ADMINISTRATION
NOVEMBER 2009
CERTIFICATION
This is to certify that this project work was carried out by in
the Department of Business Administration, School of Business
Studies for the award of higher national diploma in business
administration.
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.. .
Project Supervisor Centre Coordinator
... .
Date Date
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DEDICATION
This research work is dedicated to the Almighty God for seeing me
through the whole period of the program and granting me academic
excellence despite the difficulty encountered.
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ACKNOWLEDGEMENT
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To God be the glory for its not by my power nor my might but by His
grace that is superfluous and more than sufficient. I thank Him for
making this programme a reality.
I am also grateful to my supervisor Emmanuel N. Bassey for his
painstaking and thoroughness in supervising this project.
I acknowledged the immense support I received from my family
especially their encouragement during the period of the programme.
The cooperation and the encouragement of my supporting staff who
always stand in for me anytime I am away.
This acknowledgement will be incomplete without noting the
contribution of the following people to the success of the programme,
the school registrar, the assistance registrar and other friends who
had contributed in one-way or the other to the successful completion
of the programme.
A special word of thanks go to staff of C.A.C.T. Publishers in typing
the various draft of the manuscript.
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I wish to conclude this acknowledgement by expressing my sincere
appreciation to all my colleagues for their friendly disposition towards
me during the period of the programme. MAY GOD BLESS YOU ALL.
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ABSTRACT
The design of the good transparency practices in the Code rests on
two principles. First, monetary and financial policies can be made
more effective if the public knows the goals and instruments of policy
and if the authorities make a credible commitment to meeting them.
Second, good governance calls for central banks and financial
agencies to be accountable, particularly where the monetary and
financial authorities are granted a high degree of autonomy.
The Code contains a listing of broad principles related to transparency
for monetary and financial policies that central banks and financial
agencies should seek to achieve. As a guide to their implementation,
the IMF staff, in cooperation with relevant international organizations
and in close consultation with officials from central banks and financial
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agencies from the Fund membership, has prepared a supporting
document to the Code.
TABLE OF CONTENT
Title page - - - - - - - - i
Certification page - - - - - - - - ii
Dedication page - - - - - - - - iii
Acknowledgment page - - - - - - - iv
Abstract page - - - - - - - - vi
Table of content - - - - - - - - vii
CHAPTER ONE INTRODUCTION
1.0 The background of the study - - - - - 1
1.1 Statement of the research problem - - - - 2
1.2 The objective of the study - - - - - 3
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1.3 The Significance of the study - - - - - 4
1.4 The scope of the study - - - - - - 5
1.5 Limitation of the study - - - - - - 6
1.6 Research methodology - - - - - - 6
1.7 Research hypotheses - - - - - - 7
1.8 Operation definition of terms - - - - - 8
CHAPTER TWO- LITRATURE REVIEW
2.0 Economic reforms and monetary policy - - 10
2.1 Monetary policy implementation - - - 17
2.2 Monetary policy management - - - - 21
2.3 What is monetary policy - - - -- 28
2.4 Expansionary monetary policy - -- 29
2.5 Restrictive monetary policy - - - - 30
2.6 Administration of policy in Nigeria - - - 32
2.7 Objectives & roles of monetary
Policy in a development economy - - - 33
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2.8 Conflicts in the achievement
of monetary policy objective - - - - 33
2.8.1 Necessary conflicts - - - -- 34
2.8.2 Policy conflicts - - - - - - 35
2.8.3 Conflicts resolution - - - -- 36
2.9 Limitations of monetary policy in
less developed countries (LDCs) - - - 36
CHAPTER THREE
RESEARCH METHODOLOGY AND DESIGN
3.1 Introduction - - - - - -- 40
3.2 Research methodology - - - - - 40
3.3 Research design - - - - - - 41
3.4 Sources of data - - - - - - 42
3.5 Secondary data - - - - - - 42
3.6 Population description - - - - - 43
3.7 Sample size - - - - - -- 43
3.8 Instruments for data collection - - - 44
3.9 Methods of data analysis - - -- 44
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3.10 Model specification and estimatation techniques 44
3.11 Statistics for testing hypotheses - - - 46
CHAPTER FOUR
DATA PRESENTATION , ANALYSIS OF RESULTS AND INTERPRETATION
4.1 Introduction - - - - - - 49
4.2 Presentation and analysis of data - - - 50
4.3 Testing the hypotheses - - - - - 51
4.4 Research findings - - - - - - 54
CHAPTER FIVE
SUMMARY ,CONCLUSIONS AND RECOMMENDATION
5.1 Introductions - - - - - - 55
5.2 Summary - - - - - - - 55
5.3 Conclusion - - - - - - - 57
5.4 Recommendations - - - - -- 61
5.5 Recommendations for further study - - 66
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CHAPTER ONE
INTRODUCTION
1.0 THE BACKGROUND OF THE STUDY
Monetary management deals with the control of the money stock (or
liquidity) and, therefore, interest rates, in order to influence such
macroeconomic variables as domestic prices, employment, balance of
payments and aggregate output in the desired direction. There is no
standard or ideal structure of monetary policy targets and instruments.
The structure varies from country to country, depending on the size
and stage of development of the financial market, and for any one
country, the optimal targets and structure change over time. Where the
financial environment is under-developed, the instruments of monetary
management tend to be limited largely to direct measures, such as
administered interest rates regimes, directed credit, and mandatory
guidelines to banks. Market-based instruments, on the other hand,
usually work best in economies where the financial market is developed
and the real sector is responsive to changes in monetary policy stance.
The institutional framework for monetary and financial policies
management is usually provided by the law, which defines the
relationship between the central bank and its stakeholders. Also, since
monetary and financial policies are part of the overall national
economic policy, efforts are normally made to reconcile and harmonise
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them with the various policies of government to ensure consistency and
effectiveness.
In Nigeria, monetary and financial policies are carried out by the
Central Bank of Nigeria in collaboration with the other relevant
regulatory agencies of the government. However, the instrument
autonomy granted to the bank in 1998 insulates it from undue political
interference in its conduct of monetary and financial policies and,
thereby, enable it to act more pro-actively and promptly in its policy
responses to changes in economic conditions.
1.1 STATEMENT OF THE RESEARCH PROBLEM
The study is a worth-while effort in that it will avail the researcher of
the opportunity to make a categorical statement based on the findings
of the study, on the relative effectiveness of the use of monetary
policy.
To appreciate the mechanism for managing the monetary and financial
system, it is pertinent to understand why the authorities pay so much
attention to a sound and stable financial system, and why attempts are
usually made to strike a balance between the growth of monetary
aggregates and macroeconomic stability. A sound and efficient financial
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system provides a medium for financial intermediation to take place
and for resources to be deployed efficiently for greater productivity.
In the conduct of monetary policy, the authorities focus on controlling
the growth of money because empirical evidence suggests that
excessive monetary growth leads to an unstable macroeconomic
environment with its attendant adverse consequences for economic
activities. Thus, central banks deliberately strive to control the rate of
growth of money supply in order to influence key macro variables and
economic activities in general, in the desired direction.
1.2 THE OBJECTIVE OF THE STUDY
It would have been a total waste of time, efforts, energy and of
course fund, in conducting this research if it was not meant to
achieve any meaningful objectives the research would also have
been seen as a fruitless exercise if there were no fundamental
objectives to be achieved at the end of the study. The objectives
of the study therefore were:
(i) To investigate the role and the relative efficiency of the use
of monetary policy In Nigeria
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(ii) To find out whether or not, monetary policy is effective in
the control of inflation in the Nigerian economy.
(iii) To enable the researcher to avail herself of the opportunity
to contribute her quota to the pool of knowledge on the
formulation, implementation and management of monetary
policy in Nigerian
(iv) To provide an objectively sufficient ground for the
researcher to make contributions to the "GREAT DEBATE"
as to which policy package appears to be the most effective,
weapon of management and stabilisation of the Nigerian
economy.
1.3 THE SIGNIFICANCE OF THE STUDY
The researcher has no doubt whatsoever, that the findings and
recommendations presented and offered respectively in this
study, will be of immense benefit to the following categories of
people among others:
(i) POLICY MAKERS OR FORMULATORS
Makers or formulators of macroeconomic policies, economic
planners, and economic advisers to the Federal Government
of Nigerian, will find the recommendation in this study very
useful in the performance of their respective duties. This is so
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because they (policy makers economic planners) can use the
research report as a guide while formulating some important
macroeconomic policies.
(ii) OTHER RESEARCHERS
Other researchers can also use the work as a reference material
where and when necessary.
(iii) RESEARCH STUDENTS
Research students will equally find the findings and
recommendation offered in this study very useful for further
research and for reference purposes, especially if they (students)
are researching into a related area.
1.4 THE SCOPE OF THE STUDY
The study was conducted for the purpose of evaluating the
relative effectiveness of the use of monetary policy in Nigeria,
hence the study encapsulates an examination of the relative
efficacy of the use of monetary policy, instrument in the control
of the Nigerian economy. The study also examined some related
policy instrument or tools used in fine-turning the economy
(Nigerian Economy).
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1.5 LIMITATION OF THE STUDY
The task of carrying out a Research work requires spending
times, money, energy and the necessary manpower to have the
study completed. furthermore, the present economic relate
realities in the country (Nigeria) act as impediments to a wider or
multinationals coverage of a research exercise to this nature.
Based on the forgone factors or constraints, the researcher, in
carrying out this study, limited herself to the Nigerian economy
only.
However, other researchers may wish to conduct a similar study
in other less developed countries (LDLS) and the developed
countries (DCS) alike,
1.6 RESEARCH METHODOLOGY
For a proper or adequate attainment of the objectives of the
study, the research work was organised into five (5) chapters.
Chapter one (1) introduces the study and explored the
background to the study. it also deals with other relevant issues
in the study, such as the problem of the study, the objectives of
the study, the scope of the study, the significance, and its
limitations.
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The chapter also disuses the research hypothesis, methodology of
the study and the operational definition of terms used in the
study.
chapter two (2) contains a review of related literature on the
problem under study chapter three (3) deals with the design of
the study with regards to gathering or collection of data and the
instruments used in analysing it.
In chapter four (4) the data so collected, are presented,
analysed and interpreted accordingly.
Chapter five (5) which is the last but not the least gives the
summaries conclusions drawn from the findings, and the
recommendation made by the researcher.
1.7 RESEARCH HYPOTHESES
In view of the problems earlier defined in this study, and the
objectives of this study which have been the Transparency in
monetary and financial policy in Nigeria, the following Research
Hypotheses were being formulated:
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HYPOTHESIS ONE (1)
NULL HYPOTHESIS (Ha):
H1: a1 = O: Monetary and financial policies are not geared
towards providing a sound and stable financial environment.
ALTERNATIVE HYPOTHESIS (H1):
H1: a1 = O: monetary and financial policies are geared towards
providing a sound and stable financial environment
HYLPOTHESIS TWO (2)
NULL HYPOTHESIS (H0):
HO:a2 = 0: Monetary management does not deal with the
control of the money stock (or liquidity)
ALTERNATIVE HYPOTHESIS (H1):
H1: a2 = 0: monetary management deals with the control of the
money stock (or liquidity)
1.8 OPERATION DEFINITION OF TERMS
In order to foster a proper understanding of the research report,
and to expose readers to the tenets of the study, some terms which
were used in their operational or contextual sense rather than in
their literary or lexical sense, were variously defined or explained:
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AN ECONOMY
According to Lipsey (1963), as cited in Anyanwu (1997), An
economy refers to any specified collection of interrelated marketed
and non-marketed productive activities in a country.
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CHAPTER TWO
LITERATURE REVIEW
2.0 Economic Reforms and Monetary Policy
Direct controls, pervasive government intervention in the financial
system resulting in the stifling of competition and resource
misallocation, necessitated the introduction of the Structural
Adjustment Programme (SAP) in 1986. SAP was a comprehensive
economic restructuring programme which emphasized increased
reliance on market forces. In line with this orientation, financial sector
reforms were initiated to enhance competition, reduce distortion in
investment decisions and evolve a sound and more efficient financial
system. The reforms which focused on structural changes, monetary
policy, interest rate administration and foreign exchange management,
encompass both financial market liberalization and institutional building
in the financial sector. The broad objectives of financial sector reform
include:
Removal of controls on interest rates to increase the level of savings
and improve allocative efficiency;
Elimination of non-price rationing of credit to reduce misdirected credit
and increase competition;
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Adoption of indirect monetary management in place of the imposition of
credit ceiling on individual banks;
Enhancing of institutional structure and supervision;
Strengthening the money and capital markets through policy changes
and distress resolution measures;
Improving the linkages between formal and informal financial sectors.
The implication of these reforms on monetary policy
-Increase in the number of Banking Institutions
One of the objectives of financial reforms was to provide a liberalized
and level playing field for the emergence of effective and efficient
institutions that would serve as an engine of growth for the economy.
Consequently, innovative institutions were encouraged to take
advantage of the opportunities created by the financial liberalization
policies. The structural changes in the financial sector were designed to
increase competition, strengthen the supervisory role of the regulatory
authorities and streamline public sector relationship with the financial
sector. As part of the reform programme, operating licences for
opening bank house were liberalized. Prior to 1986, Nigeria had only 40
banks, but the number increased progressively to 120 in 1992. By
1998, however, the number of banks in operation declined to 89 as a
result of the liquidation of over 30 terminally distressed banks. Other
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types of financial institutions also increased substantially. Indeed some
of these institutions, such as the discount houses and bureaux de
change were not in existence before 1986. The capital base of all the
financial institutions was also increased. For instance, the minimum
capital requirements of banks stood at N500 million with effect from
December, 1998 compared with N10 million and N6 million for
commercial and merchant banks, respectively, in 1989.
-New Products Development
The reforms in financial sector created certain salutary effect on the
financial system. Some of such effects include improved service
delivery through new innovations and product development. The use of
modern technology enhanced service delivery and eliminated queues in
banking halls which used to be the common feature of banks in Nigeria.
Also, Automated Teller Machines (ATMs) were installed at designated
points across the country to further reduce customer traffic to banks for
cash withdrawals. The use of debit and credit cards was also being
popularized by some banks to reduce the risk of carrying cash for
transactions. Thus, the 1986 reform introduced e-money in Nigerias
banking lexicon.
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-Shift in Monetary Policy Management
It would be recalled that the direct approach to monetary management
was the main technique of monetary policy implementation in Nigeria
before the introduction of the Structural Adjustment Programme (SAP).
Between 1986 and 1993, the CBN made efforts to create a new
environment for the introduction of indirect approach to monetary
management. A major action taken as part of the monetary reforms
programme was the initial rationalization and eventual elimination of
credit ceilings for selected banks that were adjudged to be sound. After
the initial test run of the indirect monetary management approach,
monetary management shifted to the indirect approach in which Open
Market Operations (OMO) was the principal instrument of liquidity
management. Since the introduction of the indirect approach, the
primary and secondary markets for treasury securities have been
developed to take advantage of liberalization introduced through the
reforms. Discount houses, banks and recently some selected
stockbrokers are now very active in the primary market for treasury
bills.
-Interest Rate Regime
In August, 1987 the CBN liberalized the interest rate regime and
adopted the policy of fixing only its minimum rediscount rate to indicate
the desired direction of interest rate. This was modified in 1989, when
the CBN issued further directives on the required spreads between
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deposit and lending rates. In 1991, the government prescribed a
maximum margin between each banks average cost of funds and its
maximum lending rates. Later, the CBN prescribed savings deposit rate
and a maximum lending rate. Partial deregulation was, however,
restored in 1992 when financial institutions were required to only
maintain a specified spread between their average cost of funds and
maximum lending rates. The removal of the maximum lending rate
ceiling in 1993 saw interest rates rising to unprecedented levels in
sympathy with rising inflation rate which rendered banks high lending
rates negative in real terms. In 1994, direct interest rate controls were
restored. As these and other controls introduced in 1994 and 1995 had
negative economic effects, total deregulation of
interest rates was again adopted in October, 1996.
-The Payment System
The Nigerian payments underwent substantial modernization of the
process for handling payments with the implementation of the Magnetic
Ink Character Recognition (MICR), which involved the phased adoption
of MICR technology for processing of inter-bank transfer and in-house
cheques. This was followed by the establishment of Automated Teller
Machine (ATMs) by most banks for cash dispensing, account balance
enquiry and payment of utility cheques. The ATMs in addition provided
the basis for setting up electronic links to on-line customers and other
accounts system among bank branch network to facilitate payments
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service. To further improve the efficiency of the payment system, the
CBN in 2004 issued the broad guidelines on electronic banking (e-
banking). E-banking practice in Nigeria will continue to be promoted in
line with global trend. The Bank will continue to encourage banks to
install ATM machines for cash withdrawals. Also, in order to encourage
the use of electronic money (e-money), in line with international best
practices, the Bank continues to issue specific guidelines on standards
and use of e-money products such as credit cards, debit cards, digital
cash etc. With the recent revolution in the telecommunication sector,
the environment for efficient e-banking service delivery has been laid.
The CBN has continued to promote the automation of the payments
system to reduce delays in the clearing of payment instruments;
reduce cash transactions; and enhance the transmission mechanism of
monetary policy. In order to deal with large-value payments and
settlements, the CBN has embarked on the implementation of Real
Time Gross Settlement (RTGS) system. The RTGS will eliminate the risk
in large-value payment,
and increase the efficiency of the payment system.
-Foreign Exchange Management
As part of the reforms, the foreign exchange market was liberalized
with the reintroduction of the Dutch Auction System (DAS) in July 2002
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with the objectives of realigning the exchange rate of the naira,
conserving external reserves, enhancing market transparency and
curbing capital flight from the country. Under this system, the Bank
intervened twice weekly and end-users through authorized dealers
bought foreign exchange at their bid rates. The rate that cleared the
market (marginal rate) was adopted as the ruling rate exchange rate
for the period, up to the next auction. DAS brought a good measure of
stability in exchange rate as well a reduction in the arbitrage premium
between the official and parallel market rates.
To further deregulate the foreign exchange market and also demystify
access to Travelers Cheque (TCs) by end-users, Travelex Global and
Financial Services and American Express (AMEX) commenced the direct
sale of TCs to end-users in February 2002. The initiative, among
others, was aimed at addressing some travel-related problems
associated with foreign exchange utilization. Specifically, the objectives
were to: facilitate easy access to travelers cheque by end-users;
reduce the transaction cost to end-users of travelers cheque; eliminate
the use of spurious documents in obtaining TCs; reduce the gap
between the official and parallel market exchange rates; and encourage
the growth of bureaux de change operations.
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Other measures adopted to enhance the operational efficiency of the
foreign exchange market included the unfettered access granted
holders of ordinary domiciliary accounts to their funds, while utilization
of funds in the non-oil export domiciliary accounts were permitted for
eligible transactions. Furthermore, inward money transfers became
payable in the currency of remittance. All oil and oil service companies
were allowed to continue to sell their foreign exchange brought into the
country to meet their local expenses to any bank of their choice,
including the CBN. Procurement of foreign exchange for Business Travel
Allowance (BTA) and Personal Travel Allowance (PTA) remained eligible
in the foreign exchange market, subject to a maximum of US$2,500.00
per quarter for BTA and US$2,000.00 twice a year for PTA for
beneficiaries above 12 years old. For travels to countries in the
ECOWAS sub-region, BTA and PTA are issued in ECOWAS travellers
Cheques.
2.1 Monetary policy implementation
The International Monetary Fund (IMF) has called on the Federal
Government to ensure a consistent implementation of a clearly
articulated monetary policy framework.
According to the Brentwood organization, such monetary policy must
focus on price stability and based on the relationship between monetary
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aggregates and inflation, is needed to anchor inflation expectations and
establish credibility.
In its Public Information Notices (PINs) after its executive board
concluded Article IV Consultation with the authorities, the Fund said
that effective communication of the framework will also be critical.
It stated, Our directors welcomed the authorities intention to do so.
Directors also welcomed the plans to move forward cautiously with the
adoption of an inflation-targeting framework, with due attention to the
necessary institutional underpinnings for such a regime.
IMF supported the increased flexibility of the exchange rate in recent
months, which will support the implementation of monetary policy
focused on price stability, noting that the level of the naira is consistent
with external stability.
It welcomed the measures taken to identify and resolve problems in
bank balance sheets, while the system as a whole has significant
capital, individual banks that pursued high-risk strategies and allegedly
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violated governance and prudential regulations during the recent period
of rapid credit growth are vulnerable.
The international financial institution called on the Federal Government
to press ahead with their efforts to address governance problems and
resolve the intervened banks.
It observed that a robust financial stability framework will be important
for the sustained development of the financial sector and lauded the
improvements already in train, including steps to improve the
credibility of information on bank balance sheets and to establish a
macro prudential unit within the Central Bank.
IMF, therefore, emphasised the urgency of implementing the
framework for risk-based and consolidated supervision.
It will also be important to develop a clear framework for dealing with
bank failures, and to strengthen cross-border supervisory
arrangements in view of the rapid expansion of Nigerian banks across
borders.
The Fund commended the proposed overhaul of the framework for the
oil and gas sector, noting its critical importance from a macroeconomic
perspective, throwing its weight behind the Federal Governments goals
of improving governance, enhancing transparency, and creating an
efficient fiscal regime that remains attractive to investors.
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Achieving these improvements will require further detailed quantitative
analysis and careful design of transitional arrangements. In parallel
with energy reform, directors welcomed the authorities emphasis on
structural reforms aimed at diversifying the economy and strengthening
infrastructure, it stated.
It agreed that the growth outlook warrants a supportive fiscal stance,
while recognising that financing and administrative capacity constraints
limit the scope for such support.
The Fund, therefore, welcomed the authorities prudent approach to
fiscal policy, and its focus on actions to improve budget execution and
enhance public financial management as well as to increase fiscal
space. Building on past success with the oil-price-based fiscal rule,
fiscal policy over the medium term will need to be more consistently
counter-cyclical in order to neutralise the macroeconomic impact of
swings in oil prices and support private sector-led growth.
It noted that reforms initiated earlier this decade have done much to
soften the impact of the global financial crisis on the nations economy.
The substantial cushion of oil savings and foreign reserves built up
when oil prices were surging, together with bank consolidation and
recapitalization, has enabled policy makers to manage the crisis fallout
from a position of strength. The near-term outlook is nevertheless
challenging and highly dependent on developments in oil prices.
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The authorities commitment to a strong macroeconomic and financial
policy framework that can support an early recovery and lay the basis
for the successful implementation of Nigerias Vision 2020 development
plan is welcomed.
2.2 Monetary policy management
Monetary and financial policies are geared towards providing a sound
and stable financial environment that is conducive for the attainment of
both macroeconomic stability and growth.
The Central Bank of Nigeria (CBN) as the apex financial institution, has
the responsibility for the design and implementation of monetary and
financial policies, as well as the regulation and supervision of the
nations financial policies.
The latter function is, however, carried out in collaboration with other
key financial regulatory agencies of the Federal Government.
To appreciate the mechanism for managing the monetary and financial
system, it is pertinent to understand why the authorities pay so much
attention to a sound and stable financial system, and why attempts are
usually made to strike a balance between the growth of monetary
aggregates and macroeconomic stability. A sound and efficient financial
34
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system provides a medium for financial intermediation to take place
and for resources to be deployed efficiently for greater productivity.
In the conduct of monetary policy, the authorities focus on controlling
the growth of money because empirical evidence suggests that
excessive monetary growth leads to an unstable macroeconomic
environment with its attendant adverse consequences for economic
activities. Thus, central banks deliberately strive to control the rate of
growth of money supply in order to influence key macro variables and
economic activities in general, in the desired direction.
This implies that, there is an optimal rate of monetary growth that
would foster exchange rate and price stability, and savings and
investment that are consistent with a given output growth. Thus, it is
highly desirable to exercise appropriate control, not only over the
growth of monetary aggregates, but also over the financial sector
through which the monetary policy measures are transmitted to the
real sector of the economy.
Basically, monetary management deals with the control of the money
stock (or liquidity) and, therefore, interest rates, in order to influence
such macroeconomic variables as domestic prices, employment,
balance of payments and aggregate output in the desired direction.
There is no standard or ideal structure of monetary policy targets and
instruments. The structure varies from country to country, depending
on the size and stage of development of the financial market, and for
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any one country, the optimal targets and structure change over time.
Where the financial environment is under-developed, the instruments
of monetary management tend to be limited largely to direct measures,
such as administered interest rates regimes, directed credit, and
mandatory guidelines to banks. Market-based instruments, on the other
hand, usually work best in economies where the financial market is
developed and the real sector is responsive to changes in monetary
policy stance.
The institutional framework for monetary and financial policies
management is usually provided by the law, which defines the
relationship between the central bank and its stakeholders. Also, since
monetary and financial policies are part of the overall national
economic policy, efforts are normally made to reconcile and harmonise
them with the various policies of government to ensure consistency and
effectiveness.
In Nigeria, monetary and financial policies are carried out by the
Central Bank of Nigeria in collaboration with the other relevant
regulatory agencies of the government. However, the instrument
autonomy granted to the bank in 1998 insulates it from undue political
interference in its conduct of monetary and financial policies and,
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thereby, enable it to act more pro-actively and promptly in its policy
responses to changes in economic conditions.
As you may recall, the CBN adopted the indirect techniques of
monetary control in 1993 with reliance on the use of market-based
instruments, such as, Open Market Operations, complemented by
reserve requirements and discount window operations. In addition,
there was significant deregulation of financial activities, as the
operation of the techniques of indirect monetary control requires a
deregulated, competitive and sound money market.
Other measures were also taken to strengthen the legal and
institutional framework, as well as check excess liquidity in the system
and foster prudential regulation.
Specifically, some of these measures included regular review of the
minimum paid-up capital requirement for bank; issuance of prudential
guidelines on income recognition and provisioning for non-performing
loans to enhance standardization and improve the quality of financial
reporting; measures to deal with technically insolvent and distressed
banks; and the improvement of regulatory and supervisory framework
for banks and other financial institutions.
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Experience shows that monetary policy and banking activities have
strong links. Monetary policy is implemented through the banking
system and influences the activities of banks and other financial
institutions and vice versa. Thus, while some policy measures are
designed to achieve appropriate growth of money stock, others are
taken to foster safe and sound financial system.
As you are all aware, the CBN issues its approved monetary and
financial policies in the form of "Monetary, Credit, Foreign Trade and
Exchange Policy Guidelines". The guidelines do not only prescribe what
the banks would do in order to foster a sound financial system and
enhance macroeconomic stability, but also prescribe the penalties for
default.
Furthermore, the effects of the policy measures on the movement of
money stock, and the health of the banks are regularly reviewed while
the overall impact of policy on the economy is also appraised. This
exercise assists the CBN to determine whether to continue with the
existing measures or to initiate a review of the policy package, either to
change the direction or to fine-tune existing policies.
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Monetary and financial policy outcomes in recent years, have been
influenced largely by the surge in banking system liquidity, resulting in
excessive growth in monetary aggregates vis--vis programme targets.
You will recall that excess liquidity persisted in year 2000, especially as
a result of the lagged effect of the CBN financial of the huge fiscal
deficit in the first half of 1999. This situation was further compounded
by the substantial monetisation of enhanced foreign exchange receipts
and the transfer of most government and parastatal accounts to
commercial and merchant banks during the year.
These developments, coupled with the unprecedented surge in foreign
exchange demand, threatened monetary and exchange rate stability in
year 2000. Also, the wide spread between bank deposit and lending
rates was a major concern to the bank.
The CBN's policy responses to these developments during the year
were guided by the desire to keep inflation within a single digit level,
maintain interest rates at a level that would encourage productive
borrowing/investment, as well as improve overall confidence in the
financial system. In addition, the bank remained committed to
nurturing a more competitive and efficient financial environment,
guided by market criteria, and enhancing the effectiveness of the
monetary management process.
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In continuation of the distress resolution efforts, three banks recently
had their licenses revoked and were transferred to the Nigeria Deposit
Insurance Corporation (NDIC) for eventual liquidation. Perhaps, I
should take this opportunity to stress that efforts would be sustained in
2001 to address any symptom of distress in the system in a timely and
decisive manner.
In the spirit of greater transparency in the conduct of monetary and
financial policies, which has become the norm globally, the bank has
also established a Monetary Policy Forum where key government
officials, financial market operators, academia, as well as other
stakeholders in the private and public sectors of the economy, will be
invited from time to time to brainstorm on major monetary and
financial policy issues.
This new initiative is designed to enhance the transparency of monetary
and financial policy process in Nigeria. Increased transparency in the
manner we envisage, would help to clarify long-term policy objectives,
improve the workings of financial markets, enhance the credibility and
accountability of the Central Bank of Nigeria, as well as work to
strengthen the effectiveness of monetary and financial policies.
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The CBN GOVERNOR SAID-I have sought to review some conceptual
issues in monetary and financial policies management with a view to
putting our discussion in proper perspective. I have also tried to
examine the policy outcomes in recent years and observed that a
number of measures were adopted since 1990 to strengthen the
financial system. In this regard, I should stress that the central bank
will continue to play its statutory role in ensuring monetary stability
and enhancing the health and efficiency of the financial services
industry.
2.3 What is Monetary Policy?
Monetary policy refers to that 0policy measure or action
undertaken by the government in order to achieve her economic
objectives using the monetary instruments of control over bank
lending and the rate of interest.
It is governments deliberate attempt to influence aggregate
demand in an economy by regulating the cost and availability of
credit.
The government can influence both the cost and availability of
credit by following measures designed to affect the coming's
supply oif money these include open market operations, special
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deposits direct control over lending by banks and other Financial
institutions, and various forms go requests.
Anyanwu (1993) defines monetary policy as a policy designed to
affects the level a aggregate demand through the supply of
money, cost of money and availability of credit.
From the above, it can be seen that monetary policy is concerned
with the regulation of the volume of money in circulation at any
pint in time.
2.4 EXPANSIONARY MONETARY POLICY
Monetary policy is expansionary if it seeks to increase the volume
of money supply in he economy through changes in interest rate
and reserve ratios.
Jhingan (1983), defines expansionary monetary policy as that
which ease the credit market conditions and leads to an upward
shift in aggregate demand in an economy
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An expansionary (or easy) monetary policy is used to overcome a
recession or a depression or a deflationary gap.
Bornbusch (1993) argued that when there is a fall in consumer
demand for goods and services, and in business demand for
investment goods, a deflationary gap emerges.
He further say that for this purpose, the Central Bank purchases
government securities in the open market, lowers the reserve
requirements of member banks, lowers the discount rate and
encourages consumer and business credit through selecting credit
measure.
By such measures as enumerated above, the Central Banks
decreases the cost and availability of credit in the money market,
and improves the economy.
2.5 RESTRICTIVE MONETARY POLICY
Monetary policy is a major economic stabilisation weapon which
involves measures designed to regulate and control the volume,
cost availability and direction of money and credit in an economy
to achieve some specified macro economy policy objectives.
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This is to say that monetary policy is a deliberate effort by the
monetary authorities (Central Bank) to control the supply and
credit conditions fro the purpose of achieving certain broad
economic objective
In the words of Olajide (1976), Monetary policy is restrictive if it
is designed to curtail; aggregate demand in an economy".
He argued further that monetary policy is used to overcome an
inflationary gap. The economy experiences inflationary pressures
due to rising consumers' demand for goods and services and
there is also boom in business investment.
Abdulahi (1998 ), is in agreement with the view of Olajide
(1976) when he said that the Central Bank embarks on a
restrictive monetary policy in order to lower aggregate
consumption and investment by increasing the cost and
availability of credit.
It might do so, he argued further, by selling government
securities in the open market, by raising the reserve
requirements of member banks, by raing the discount rather and
controlling consumer and business credit through selective
measures.
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By such measure as enumerated above, the central Bank of
Nigeria (CBN) increase the cost and reduces availability of credit
in the money market and thereby controls inflationary pressures
in the economy.
2.6 ADMINISTRATION OF MONETARY POLICY IN NIGERIA
In Nigeria, the administration/implementation of monetary policy
measures is done by the central bank of Nigeria (CBN), with
some degree of political / government interference in some
cases. In some other countries such as the United state of
America (U.S.A), the Federal Reserve System administers
monetary policy with minimum (relative) government
interference.
In Nigeria, before 1986, the central Bank of Nigeria (CBN) was
empowered to carry out monetary policy formulation and
implementation in consultation with the Federal Ministry of
Finance. By then where disagreement arose as to either what the
contents of the policy were to be, or the "modus operandi" of
pushing it through reference was being made to the Federal
executive council which was the fianl arbiter by than.
However, the Central Bank of Nigeria was made fully autonomous
thereafter.
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2.7 OBJECTIVE & ROLES OF MONETARY
POLICY IN A DEVELOPING ECONOMY
The objectives of monetary policy refer to the Ultimate macroeconomic
goals which can change from time to time defending on the economic
fortunes of a particular country.
Generally, and according to Okafor (1992), such objective or roles of
monetary policy include.
(i) Maintenance of relative stability in domestic prices.
(ii) Attainment of a high rate of, or full employment.
(iii) Achievement of a rapid, high and sustainable economic
growth.
(iv) Maintenance of Balance of payments (BoPs) equilibrium.
(v) Achievement of a stable exchange rate system within the
economy
2.8 CONFLICTS IN THE ACHIEVEMENT OF MONETARY POLICY
OBJECTIVE
Indeed the objectives of monetary policy do conflict or are
incompatible in some case that is to say that the attainment of
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one may preclude the attainment of another or others. In other
words tarde-off do exist in het attainment of policy objectives.
According to Cuberton (1961), as cited in a folabi (1995), there
are two types of conflicts in the attainment of monetary policy
objectives. These according to line, include
(a) Necessary conflict
(b) Policy conflict
2.8.1NECESSARY CONFLICT
A necessary conflict exist as if the attainment of one objective
precludes the attainment of the other. That is to say that the
objectives are inherently incompatible, fro example, if the Phillips
Aurice is accepted, at least in the short run, improvement in
employment may only be achieved at the cost of additional
inflation and Vice Versa.
It is perhaps on the above ground that Adejuge (1995) argued
that full employment may conflict with rapid economic growth
which is dependent on the acceptance of innovation and changes,
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if Maintenance of full employment encourages reliance on the
status quo.
2.8.2POLICY CONFLICT
According to Culberton (1961), as cited in Afolabic (1995), a
policy conflict arises when monetary policy has difficulty in
pursuing both goals Simultaneously or when the government
takes measures that will jeopardise the simultaneous
achievement of the objectives.
He argued further that are easy monetary policy designed to
stimulate economic growth will lower the rate of interest and
may generate higher inflation if the growth is not sufficient
enough to inhibit it
It follows therefore, that in a situation where the economy is
experiencing inflation and show pace of economic growth, a tight
(Restrictive) monetary policy (to fight inflation) will reduce
investment and growth even further.
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2.8.3CONFLICT RESOLUTION
In the event that monetary policy objectives are not mutually
attainable, a trade-off among them must be considered as a way
out while each objective is ranked with respect to its relation
importance. This is why Ajayi et all (1980), opined that the
ranking has to bwe the responsibility of monetary authorities
(the Central Bank) and the government, based on the state of the
economy
2.9 LIMITATIONS OF MONETARY POLICY IN LESS
DEVERLOPED COUNTRIES (LDCs).
Despite the laudable objectives of monetary policy, experience
reveals that in underdeveloped countries including Nigeria,
monetary policy plays a limited role,
some argument have been put forward in support of the above
view.
According to Thingan (1983), the limitations of monetary policy in
his developed countries are due to the underlisted factors:
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(i) Large Non-monetised Sector - Thingan (1983),
maintains that there is a large non-monetised sector in the
economies of developing countries which hinders the
success of monetary policy. He argued further that in the rural
areas where barter are still in exisstence, hence monetary
policy fails to influecnec this large segment of the
economy.
(ii) Undeveloped money and capital markets: The money
and capital market are undeveloped. These markets, in
hte views of Thingan, lacle in bills, storks, and shares,
which limit the success of monetary policy
(iii) Large Number of NBFLs:
Non-Bank Financial intermediaries like the commercial Banks,
operate on a large scale in the LDCs, but they are not under the
control of the monetary authority. This factor, he argued
further, limits the effectiveness of monetary policy in
these countries.
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(iv) High Liquidity:
The majority of commercial Banks possess high Liquidity so that
they are not influenced by the credit policy less
effective.
(v) Existence of Foreign Banks:
In almost all less developed countries of the world, there exist
foreign owned commercial banks. These foreign Banks also
render monetary policy ineffective by selling foreign assets and
drowning money from their head offices, even when the
central bank of hte country they are operating is pursuing a tight
monetary policy.
(vi) Small Bank Money:
Another reason advanced for the less effectiveness of monetary
policy in Undeveloped countries is the size of the money that is
in the banking system in comparison to money held outside the
banking system. Experience has shown that in most.
underdeveloped countries a very small proportion of the total
money supply constitutes the bank money, while a higher
proportion are held outside the banking system. This
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situation makes the Central Bank to be unable to control credit
effectively.
(vii) Money not Deposited with the Banks:
The "money Bags" (excessively rich persons) which exit in
virtually all undeveloped countries, do not deposit their money
with banks but prefer to use it in buying jewellery, gold, real
estate, in speculation, in consumption, etc. Such activities
encourage inflationary pressure because they lie outside the
control of the monetary authority.
On account of these limitations of monetary policy in an under-
developed country, contemporary economists advocate the use
of fiscal policy along with monetary policy.
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CHAPTER THREE
RESEARCH METHODOLOGY AND DESIGN
3.1 INTRODUCTION
It is customary to design and spelt out the method by which an
intended research work is to be conducted by the researcher.
The research design was aimed at enhancing the effectiveness of
the study thus paving way for a meaningful and systematic
approach to the study. it is on this ground that this chapter had
being devoted to the explanation of the research procedures
method of data collection sources of data collected, and the
instruments employed.
The chapter also presents the methods used in analysing the data
collected, the statistic used for testing the research hypotheses
and the decision criteria for validation (acceptance or rejection)of
the hypotheses.
3.2 RESEARCH METHODOLOGY
There are different approaches or methods often adopted in
conducting a research. Some of these methods include
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experimental method, econometric method, comparative, etc. It
is worthy to note here that the methodology to be adopted in the
collection of presentation and in analysing a research data
depends on the objectives of the study.
In this chapter, the methodology employed in this study, were
meticulously explained in the various sub sections that made up
this chapter. The main objective of this study has been to
examine the relative efficiency of monetary policy in the control
of inflation in the Nigeria economy between 1979 -2008.
3.3 RESEARCH DESIGN
The study is empirical in nature and falls within the realms of
macro economic problems This situation made the use of
historical dated inevitable. The techniques adopted in the
research involved a combination of statistical, mathematical and
econometric techniques. specifically the researcher preferred the
use of econometric model - ordinary least squares (OLS
estimation technique in estimating the impact of the independent
variables Government expenditure and money supply on the
dependent variable (Inflation). That is to say that the model
aimed at estimating and evaluating the extent to which the
repressors can explain changes in the regress and (Inflation).
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The use of historical data for the study, was informed by the need
to make use of authenticated and authoritative data computed
from published materials to give the study a more objective
approach.
The researcher decided to use ordinary least square (OLS
technique in the estimation of te parameters of the model
owing to its relative simplicity, the production of fairly satisfactory
results, as well as being widely used by economists in study of
relationships between or among economic phenomena.
3.4 SOURCES OF DATA
The source of the data collected and used in the course of this
study were mainly secondary sources among whom is the
central bank of Nigeria's statistical bulletin, etc.
3.5 SECONDARY DATA
The secondary data were gathered from a variety of sources such
as text books, journals, magazines, papers delivered at symposia
and seminars by eminent scholars, statistical and economic
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bulletins, as well as other related sources.
The researcher relied heavily on authoritative data published by
notable organisations such as the Central Bank of Nigeria (CBN),
Federal Ministry of Finance & Economic Development and the
federal office of statistics (FOS).Others were the National
Center of for Economic Management and Administration
(NCEMA).
In searching for the relevant and necessary data needed for the
research the researcher also embarked on library research.
3.6 POPULATION DESCRIPTION
The population under study included the value of government
expenditure , money supply and inflation rates in Nigeria.
3.7 SAMPLE SIZE
For every variable in the study a total of twenty (20) samples
observations were used. The sample used in the study covered
the rate of inflation government expenditure and money supply in
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the Nigerian economic between 1979 - 2008.
3.8 INSTRUMENTS FOR DATA COLLECTION
Due to the macro nature of the problem under investigation. The
use of the basic or traditional research instruments of
questionnaire, interviews, observations, etc were precluded.
However, the research relied on published (secondary) materials
from where the data considered necessary for the purpose of this
study, were completed and for extracted. The university library
also constituted a major source for data collected.
3.9 METHODS OF DATA ANALYSIS
The methods employed in the analysis of data collected were
statistical and econometric methods.
3.10 MODEL SPECIFICATION AND ESTIMATATION TECHNIQUES
The model specified for the explanation and the analysis of the
phenomena under study , showed the rate of inflation as a
function of government expenditure and money supply in Nigeria
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economic, as shown below :
INF = F(Government Expenditure, money supply)
INF = F(G EXP, Ms) __________ (1)
Linearising equation one (1) above it becomes
INF = ao + a1 GEXP + a2 Ms + u_______ (2)
DEFINITION OF VARIABLES
GEXP = Government Expenditure _ independent or exogenous
variable in the model.
Ms = money supply - an independent or exogenious variable in
the model.
INF = The Rate of Inflation - a dependent or endogenous variable
in the model.
U = The stochastic (error) term.
a0, a1 and a2 = parameters to be estimated.
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Equation four (4) above deficts inflation rate in the Nigerian
economy as being a function of, or depending on government
expenditure and money supply. The verification of the precise
extent to which each of these explanatory variables can
explain variation in the dependent variable (INF) , is a major
focus of this study, and falls within the critical area of this
study.
3.11 STATISTICS FOR TESTING HYPOTHESES
In testing the hypotheses earlier formulated in the course of this
study, the student 't' test was used in analysing and testing the
statistical significance of each of the parameters in the model
specified for this study. The 't' test involves the comparison of the
observed of 't' with the computed (Tabular) value in order to
determine the statistical significance or otherwise of the variable
to which the 't' value relates. This comparison is based on
the assumption that the null hypothesis is true. The value of the
't' statistic is given as
t* =bi
se (bi)
where
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t* = the observed 't' value
bi = the estimated value of the parameters
se = standard error of the estimate
i = 0,1,2,3 - - - - - - - - n
In caring out this test the researcher used 95% (Ninety five
percent) confidence level, that is 5% level of significance at n-k
degrees of freedom (d.f.) .
DECISION RULE FOR VALIDATION OF HYPOTHESES
If the value of the observed 't' (T- Ratio) is greater than the value
of the tabular 't' (t - critical) at n _ k degree of freedom, at 0.05
level of significance (95% confidence level ) then the null
hypothesis (Ho) stands rejected and the alternative hypothesis
( H1) accepted.
ie If t* bi > tcri(0.025) at n _ k df
Reject Null Hypothesis (Ho)
If t*bi
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Accept the Null Hypothesis (Ho)
and Reject (Hi).
(ii)THE COEFFICIENT OF DETERMINATION (R2)
This was also used in assessing the explanatory ability of the
model specified for the for this study. The R2 shows the
percentage of total variation in the dependent variable (INF) that
has being explained by the independent variables (Government
expenditure, money supply) taking together. The use of the
global test was test (R2), along with the parametric test was to
augment the parametric test.
R2 = Rss
Tss
where R2 = the Coefficient of determination
Rss = Regression sum of squares
Tss = Total sum of squares
CHAPTER FOUR
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DATA PRESENTATION, ANALYSIS OF RSULTS
AND INTERPRETATION
4.1 INTRODUCTION
The objective of this chapter were to present the data collected in the
course of this study analyse and interpret the results emanating from
the statistical and other tests carried out on the data, as well as
discussing the findings. The principal objective of this chapter was also
the validation (testing with a view to accepting or rejecting) of the
research hypotheses earlier formulated in chapter one (1) of this study.
These formed the bases of this study.
The purpose of this research had been the investigation of the relative
efficacy of the use of monetary policy in the control of inflation in the
Nigerian economy between 1979 and 1998 Vis--vis the use of fiscal
policy. In furthermore of the objective of this study, data in respect of
inflation rates, money supply and government expenditure from 1979-
1998 were collected, as presented in Appendix one (1) annexed to this
report.
4.2 PRESENTATION AND ANALYSIS OF DATA
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The data so collected, for the purpose of these research were as
presented, in the relevant tables in the appendices to this report.
The researcher built up a model for the results of the statistical analysis
carried out on the data, were also presented in appendix two (2) of this
report. The Regression Reports of the model used fro this study ere as
set out hereunder.
Model:
Y = ao + a1X1 + a2X2 + U
Where:
Y = Inflation Rate in the Nigeria Economy
X 1 = Government Expenditure
X2 = Money supply
U = Error term
ao, a, and a2 = parameters estimated.
Reports:
Y = 18.98043 + -0.00024GEXP + 0.0023/ Ms
T* = (4.927063) (-1.18226601) (1.408537)
R2 = 0.143847, R-2 = 0.82201923
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F (2,17) =2.184209, W- statistic = 0.8939
The above estimated parameters in the above model portray the
relationship between inflation (Y) as a defended variable and
Government expenditure and money supply in Nigeria during the period
1979-1998. In the model above, the autonomous interest (ao) of
18.98043 which is independent of government expenditure and money
supply, shows that even if government expenditure and money supply
were Zero, there will still be an increase of 18.98043 in the rate of
inflation in the economy.
The slope of he estimated regression line (a1) is -0.00024. this
indicates that there is no positive correction between Government
expenditure and the rate of inflation in the Nigerian economy.
The money supply coefficient of 0.00231 indicates a positive but very
weak and insignificant relationship between money supply and the rate
of inflation in the Nigerian economy.
4.3 TESTING THE HYPOTHESES
In order to pursue the objective of this study, which has been the
verification of the roles or relative efficacy of monetary policy, in the
central of inflation in the Nigerian economy between 1979 1998, this
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section of the research report was devoted to the testing of the
research hypotheses earlier stated in chapter one (1) of this study.
The statistic or tools used in testing the research hypotheses was the
student t-ratio the procedures and the rules governing the tests or
validation of hypotheses using the t statistic, were earlier stated in
chapter three (3) of this study.
HYPOTHESIS ONE (1):
NULL HYPOTHESIS (HO)
Ho: a1 = O: inflation rate in Nigeria is not significantly influenced
by variation in total government expenditure.
ALTERNATIVE HYPOTHESIS (H1)
H1,: a, = O inflation rate in Nigeria is significantly influenced by
variation in total government expenditure.
DECISION RULE:
If the value of the observed t (t-ratio) is greater than the value of the
tabular t (t critical) at n-k degrees of freedom, at 0.025 level of
significance (95% confidence level), then the null hypothesis (Ho)
stands rejected and the alternative hypothesis (H1) accepted.
This is the say:
If t* bi > teri (0.025) at n k d.f.
Reject null Hypothesis (Ho).
But if t* bi < teri (0.025) at n-k d.f.
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Accept the null hypothesis (Ho) and reject (H1).
RESULT :
The result showed that t* (a1) is 1.18223 and teri (0.025) at 17 d.f is
2.110. based on the validation rule governing this test, the null
hypothesis (Ho) is accepted thus concluding that changes in the rate of
inflation in the Nigerian economy is not significantly influenced by
changes I the level of government expenditure.
HYPOTHESIS TWO (2)
NULL HYPOTHESIS (Ho):
Ho: a2 = 0: change in the level of money supply do not have a
significant influence on the rate of inflations in Nigeria,
ALTERNATIVE HYPOTHESIS
H1: a2 = O: change in the level of money supply do have asignificant
influence on the rate of influence in Nigeria.
DECISION RULE:
If the value of the observed t (t-ratio) is greater than the value of the
tabular t (t-critical) at n-k degree of freedom (d.f.), at 0.025 level of
significance (95% confidence level), the null hypothesis (Ho) stands
rejected and the alternative hypothesis (H1) accepted.
That is to say that:
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If t* bi > teri (0.025) at n-k d.f.
Reject the null hypotheis (HO)
But if t* bi < tcri (0.025) at n-k d.f,
Accept the mill hypothesis and (HO) and reject the atternative hypothsis
(HI)
RESULT
The result should that t* (a2) is i.408536 while tori (0.025) at 17 d.f, is
2.110. from the statistics given above, toh < tori since 1.408536