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THE IMPACT OF MONETARY POLICY ON INVESTMENT IN NIGERIAN ECONOMY

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ABSTRACT

This is to examine the impact of monetary policy on investment in' Nigerian ECPMP and the objectives are as follows: To ascertain if monetary policy instruments have impact oninvestment in Nigeria, if it does, to ascertain the relationship, To examine if long run relationship exists between monetary policy instruments and investment in Nigeria, To examine if causality exists between monetary policy instruments and investment in Nigeria.

Finally, monetary Nigerian Economy, only an effective monetary policy can guarantee price /stability, which is necessary condition of sustainable growth and development of Nigerian Economy.

CHAPTER ONE

INTRODUCTION

1.0    BACKGROUND TO THE STUDY

Financial instability is the new challenge for monetary policy. Most studies indicate that thetypical patterns of financial crisis include prolonged unwinding of investment. These phenomena challenge modern monetary policy.

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (ii)cost of moneyof rate of interest, in order to attain a set of objectives oriented towards the .growth and stability of the economy.  Monetary theory provides insight into how to craft optimal monetary policy. '

Monetary policy is referred to as either being an expansionary policy or a contractionary policy. Where an expansionary policy increases the total money supply in the economy, the contractionary policy decreases the total money supply in the, economy. ,Expansionary policy is traditionally used to combat unemployment in a recession by lowering the interest rates while contractionary policy involves raising interest rate in order to' combat inflation. Monetary policy is, contrasted with fiscal policy, which refers to government borrowing, spending and. taxation.

Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can' be borrowed and the total supply of money. Monetary policy uses a variety of tools to control one or bothof these, to influence outcomes like economic growth (investment), exchange rate with other currencies and employment. Where currencyis under a monopoly, of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the systemauthority has the ability to alter the money supply and thus influence the interest rate (in order to achieve' Policy goals). The beginning of monetary policy as such comes from the late 19th,century, where it was used to maintain the gold standard.

A policy is referred to as contractionary if it reduces the size of the money supply, or-raises the interest rate, An expansionary policy increases the size of the money: supply, or decreases' the interest rate. Furthermore, monetary policies are described, as follows:accommodative, if the interest rate set by the monetary authority is 'intended to createeconomic growth: neutral if it is intended neither to create economic growth nor combat inflation: or tight, if intended to reduce inflation.

There are several monetary policy tools available to achieve these ends: increasing interest rate, by flat: reducing the monetary base and increasing reserve requirements. All have the effect of contracting the money supply; and if reserved, expand the money supply. Since the 1970s, the BRETTON WOODS system still ensured that most nations would form the two policies separately,

Within almost all modem nations, special institutions (such as ,the Bank of England, the European Central Bank the Federal Reserve in the United States, The reserve Bank, of India, the Bank of Japan or the Bank of Canada) ,exist which have the task of executing the monetary policy and often independently of the ,executive. In general, these institutions are called central banks and often have oilier responsibilities such as supervising .the full operation of the financial system.

The primary tool of monetary policy is open market operations. This entails managing quantity of money in circulation through the buying and selling of various credit instruments, foreign currencies or commodities. All of-these purchases or sales results in more or less base currency entering or leaving market circulation.

Usually the short term goal of open market operation is to achieve a specific short term interest rate target in other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold. For example, in the case of USA, the Federal Reserve targets the federal fund rate, the rate which member banks lend to one another overnight, However the monetary policy of China is to target the exchange rate between the Chinese Renminbi and a basket of foreign currencies.

The other primary means of conducting monetary policy include:

(i)      Discount window lending (lender of last resort)

(ii)     Fractional deposit lending (changes in the reserve requirement)

(iii)    Moral suasion (cajoling certain market players to achieve specified. outcomes)

(iv)    "Open mouth operation" (talking monetary policy with the market),

1.1     STATEMENT OF THEPROBLEM

The problems facing the Nigeria economy, today include increasing level of unemployment; high level/rate of inflation, over-dependence on the oil sector that is oil exports; slow pace of growth and development in real output. And otherproblems may include inadequate policies, unstable pressures on the balance of payment (BOP), persistent weakness of the naira value in foreign exchange 'market (Forex); and high/interest rates due partly to inflationary expectations, and partly to imperfections in the financial markets (both money and capital markets). Finally is the uneven income distribution, which has militated deeply against the decline in output and living standard of the people. It, nevertheless; is pellucid that, despite the exercising of monetary policy measures, the situation seems Unabated.

Over the years the central monetary authority (The Central Bank of Nigeria) has been on the active path of trying to combat the above mentioned problems by adopting one monetary policy after another taking note of the effect(s) which these, may have on various 'sectors of the economy. The latest of these is the recent bank recapitalization of N25 billion and regulation of bank lending through the interest rate of about 17%. These have had their tolls in the economy by affecting the level of investment considerably and .as we must have noticed, certain of the aforementioned problems persist. . This research project, comparatively,· is to look. at the Monetary Policy Impact on investment in Nigeria as-investment is a key factor in determining the level of performance of the economy. Hence we ask the following:

·        How far has the various monetary policy Instruments impacted in the investment atmosphere of the Nigerian economy?

·        Does these exist any relationship between the level of investment and the monetary policy instruments in Nigeria?

1.2     OBJECTIVES OF THE STUDY

The general objective of this study is to examine monetary policy in Nigeria in relation to its impact on investment. To achieve that, this topic will pursue the specific under listed objectives.

(i)       To ascertain if monetary policy instruments have impact on investment in Nigeria, if it does to ascertain the relationship.

(ii)     To examine if long run relationship exists between monetary policy instruments and investment in Nigeria .

(iii)    To examine if causality exists between monetary policy instruments and Investment in Nigeria.

1.3     HYPOTHESES OF THE STUDY

The following hypothesis will guide this study:

(i)      Ho: Monetary policy instruments do not have any significant impact on investment in Nigeria,

Hi: Monetary policy instruments have significant impact on investment in Nigeria.

(ii)     Ho: long run relationship does not exist between monetary policy instruments and Investment in Nigeria

Hi: long run relationship exists between monetary, policy instruments and investment in Nigeria

(iii)    Ho: There is no causality between monetary Instruments and investment in Nigeria.         

Hi: There is no causality between monetary instruments and investment in Nigeria

1.4     SIGNIFICANCE OF THE STUDY

Investors: Both the foreign and local investors will benefit from this work since the research exposes the impact of several monetary policy regimes on investment. This will enable the investors to know when to and when not to invest.

Policy Makers: This research will also be beneficial to the policy makers seeing that the work .will reveal the impact of monetary policy instruments on· investment in. Nigeria. This will help the policy makers know the efficient monetary policy to make regarding certain investments: foreign or local.

1.5     RESEARCH METHODOLOGY

The method to be used in approaching this subject matter shall be descriptive. It will involve the employment of tabular analysis of data and graph or both. The source of data for the purpose of this essay shall be through primary and secondary sources. This will however be through regression analysis. The secondary data shall include information from journals of commercial banks, specialized banks and the Central Bank of Nigeria (CBN). Also, collections of information from the financial statement of some specialized credit bodies.

1.6    SCOPE OF THE STUDY

This study covers the Nigerian economy from 1970 to 2096. That is, a period of thirty seven (37) years. The choice of this period is based on the availability of data and the fact that it is a time series analysis.

1.7     PLAN OF THE STUDY

The project work is divided into five chapter which are as follows;

Chapter one consists of the introduction, statements of the problem, aims and objectives of the study, research questions, research hypotheses, research methodology, scope of the study, significance of the study. Chapter two consists of the literature review of the study. Chapter three consists of the research methodology. Chapter four consists of the data analysis, presentation and interpretation of the result finding while chapter five consists of the summary of finding, conclusion and recommendation, then the bibliography.


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