Monetary Policy Measure As Instruments Of Economic Stabilization In Nigeria

MONETARY POLICY MEASURE AS INSTRUMENTS OF ECONOMIC STABILIZATION IN NIGERIA

DEFINITION OF MONETARY POLICY

Several authors have defined monetary policy in different ways. However, some of these definitions are reviewed below. According to Uzoaga (1981), monetary policy is the management of the expansion and contraction of the volume of money in circulation for the specific purpose of achieving certain declared national objectives.

G Ranlett (1965) from his own perspective defined monetary policy as the deliberate management of the money supply for the explicit purpose of attaining a specific objective or set of objectives.

Also, J Orjih (96) defined monetary policy as any conscious action under taken by the monetary authorities to change the volume, quantity, availability, cost and direction  of money and accredit in a given economy.  He defined it again as the credit control measures adopted but central banks to control the supply of money as an instrument for achieving the objectives of general economic policy.

Akin Olaloku (1979) defined money policy as consisting of actions by the government which are aimed at achieving a certain set of economic objective.  More specifically, they are the deliberate actions on the part of the monetary authority to control the monetary supply and general credit availability as  well as the level of its cost i.e., the rate of interest.

In the anniversary Bullion of 1979, Ola V. defined monetary policy as that policy designed to control the quantity, price and  direction of money supply in pursuit of national economic goals.

In view of the above varied definitions the authors see monetary policy as the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the level economic activity.

An excess supply of money will result in an excess demand for goods and services will cause rising of price and or a deterioration of the balance of payment position.  On the other hand, inadequate supply of money could induce stagnation in the economy and thereby retard growth and development.  Consequently, the central bank or central monetary authority must attempt to keep the money supply at an appropriate level to ensure sustainable economic growth and to maintain internal and external stability.  The discretionary control of the money stock by the central monetary authority thus involves the expansion or contraction of money depending on the prevailing economic condition and the channeling of money to priority sectors.

In a nutshell, the aim of monetary policy is to enhance economic stabilization.  This it does by controlling inflation, maintaining a healthy balance of payments position for the country.  This safeguards the external value of the national currency and promote an adequate and sustainable level of economic growth and development

 

  • ECONOMIC STABILIZATION

Economic  stabilization means the maintenance of a relatively stable and favourable level for all the economic indicators. This is achieved through a combination of both monetary and other policy actions of government.

Macro-economic stability is reflected by a low level of inflation and a sustainable growth and current balance.  Ins the short-run, macro economic stability is the emphasis of monetary policy.  However, it is also called upon.  However, it is also called up on to ensure a wide range of other objectives which include the restoration of external balance, maintenance of stable exchange rate to secure international competitiveness et Calera.

Debate about the theory of stabilization policy operates at two levels.  At one level, there are discussions about the kind of policy which a government ought to pursue the policy objectives and the instruments which it should use.  At another level, there are discussions about the technical details of a government chosen kind of policy.  For example whether instruments should be assigned to targets and about how policy can be prevented from actual amplifying economic fluctuations.

 

  • MONETARY POLICY OBJECTIVES AND ECONOMIC STABILIZATION

Monetary policy in the current Nigeria context encompasses actions of the central bank that effect the availability and cost of commercial and merchant banks reserve, balanced and the overall monetary and credit conditions in the economy.  The primary goals of such action is to ensure that over time, the expansion in money and credit will be adequate for the long run needs of the growing economy at stable prices.

However, in the short-run monetary policy is called upon to ensure the attainment of a wide range of other objectives.  These include, combating inflationary pressures, restoring a sustainable balance of payments, maintaining a stable exchange rate at international competitive level and restoring stability in the money market. Sometime, changes in monetary policy are undertaken as part of concerted actions to remove obstacles to the growth of savings and efficient allocation of investible funds.

The achievement of these short term objectives will invariably lead to economic stability.  However, their pursuit tents to conflict with the basic goal of stable long run growth.  For example, a vigorous anti-inflationary stance would typically require the sacrifice of output growth in the short-run.  The same might be the case where priority is given to restoring a healthy balance of payment.  Similarity, a stable exchange rate objective might call for a tighter control on aggregate demand which would in turn adversely affect output.

Moreover, attaining the objective of exchange rate stability at international competitive level could require a significant depreciation of the local currency, with attendant cost push pressure on the price.

Nwankwo (1981), x-rays both long and short-term objectives and various instruments or techniques of monetary policy in Nigeria as shown below.

 

TECHNIQUES OF MONETARY CONTROL

This is grouped into quantitative and qualitative

Quantitative Techniques

  1. Discount rate
  2. Open market operation
  3. Special deposit
  4. Variation in Reserve requirement
  5. Stabilization security

Qualitative techniques

  1. Moral suasion
  2. Credit guideline and control

Broad objective of monetary policy

  1. United strong and self reliant nation
  2. Great and dynamic economy
  3. Just and egalitarian society
  4. Land of bright and full opportunity for all citizens
  5. Free and democratic society

 

SPECIFIC OBJECTIVES

  1. Confidence in the Nigerian currency
  2. Appropriate level of money supply and interest rate
  3. Healthy balance of payments
  4. Reasonable stability in wages and prices.
  5. Support for increasing level of industrial out-put
  6. Support for increasing level of Agric output
  7. Provision and development of finance

Towards the five long-term objectives identified by Nwankwo, the central bank also enunciated various often short-term objectives which include:

  1. Full employment
  2. Rapid and sustainable high rate of economic growth
  3. Prevention of inflationary pressure or price level stability
  4. Maintenance of a balance of payment equilibrium
  5. Mobilization of domestic and attraction of foreign savings and investment
  6. Expansion of domestic output in maintenance of full potential output
  7. Restoration of confidence in the Nigerian currency
  8. Provision and organization of development finance.

As earlier stated, the primary objectives of monetary policy as instrument of economic stabilization are full employment, rapid growth, prevention of inflation and balance of payment equilibrium. However, major problem arises here due to the ambiguous nature of the goals. For instance, what is referred to as “full employment” is not clear.  Doe sit means 97 percent  or 98 percent or 150 percent of the labour force employed. Again, what is “rapid economic growth. Is it 5 percent growth in gross domestic product per year or is ti 2 percent. Also, what do we mean by “stable price”? would an increase in prices of 10 percent be acceptable or would a decline in price be even arises when we consider.

Another problem arises when we consider policy measured on inflation.  This  may simultaneously reduce employment or growth rate.  This suggests the arrangement  of trade offs between objectives and where this is not possible, an outright setting of priorities in the objectives to be achieved.

 

  • ANALYSIS OF KEY POLICY OBJECTIVES / ECONOMIC INDICATORS

Monetary policy analysts use economic and financial indicator in measuring and evaluating economic stability ad developments.  When these indicators progress in the right direction and are fairly stable over item, we say that the economy trends to develop.  However, the presence of large fluctuations and general instability portrays an under-developed economy.

It is on this basis therefore, that this section is devoted to a theoretical analysis of some vital indicators of the economy.

These indicators shall be considered in order to examine their responsibility to the various policy adopted by the monetary authority in its bid to maintain them at a convenient and stable level.

The scope of this work is a limiting factor to the extent of discussion of the indicators enumerated.  As such, only a concise treatment of some of the important objectives will be done in order to see how the monetary authority uses policy measures in its attempt to stabilize the economy.

 

UNEMPLOYMENT

Unemployment refers to a situation where a person who has reached the age of employment who is silting and able to work but has no job (Sundharam and Vatsh 1973).

There are two main types of unemployment viz: Cyclical and frictional unemployment. Cyclical unemployment is caused by a general deficiency in aggregate demand, while frictional unemployment could be structural, seasonal, residual or unemployment arising from the application of new technological  methods. Structural unemployment can result from a change in task or shift in demand from one product to another or due to labour immobility. While cyclical unemployment can be remedied using monetary policy measures, (this is does by boosting money supply in order to stimulate aggregate demand).  Frictional unemployment can only be effectively dealt with by other public measures such as retaining the labour force, creation of new jobs through public investment et cetera.

When full employment is spoken of, what is really meant is a new level of unemployment, most zero unemployment. The zero level is unattainable.  Kent (1961) provides a way out of this statement when he states that answers given by many distinguished scholars and statement have generally ranged between 3 percent and 6 percent of the labour force.

Full employment, is the main objective of monetary policy and may be defined as the existence of jobs for all those who are willing and able to work. According to Horvitz (1963), full employment of labour occurs when he number of the unemployment is equal to the unfilled vacancies.  This means that the unemployment which exist is of a  the unemployment which exist is of a frictional kind as they (unemployed ) are not suitable to fill the vacancies that exist either the to inadequate training or due to a change in technological method.  Therefore, we can conclusively say that one of the objectives of monetary policy measure of any government is to reduce unemployment to frictional levels.  If this is done, then high level of employment will be achieved, which will enhance the achievement of other concomitant objectives and consequently increase output and growth.

 

GROWTH RATE

Growth is not desired for its own sake but because of what benefits it brings to us. Analysis of the process of economic growth was a central feature of the work of the English classical economists as represented chiefly by Adam smith, Thomas and David Richards.

A rapid economic growth is the origin of higher wages and consequently an improved standard of living.  Economic growth is stimulated by a high degree of savings and investments. If savings is stimulated as against consumption, them there is a large supply of investible funds which will culminate in the employment of labour subsequently a general increase in the standard of living.  The stimulation of savings and investments is the sole preserver of monetary policy.  This it does through the manipulation of interest rates and credit control guidelines.  When interest rate is high, there is no incentive to borrow but there is the incentive to save.  Therefore, the maintenance of a suitable rate of interest for both savers and borrows stimulates both savers and borrowers stimulates both savings and borrowing for investment. Selective credit allocation is also another monetary policy measure by which the monetary authority stimulates the growth of particular sector of the economy.

Economic growth is measured in real terms and not in money terms and the most appropriate measures of economic growth is the index of gross domestic pr9oduct (GPD). It refers to the amount of production both goods and services that takes place in a country.

 

PRICE LEVEL

Inflation is a measure of the relative stability of prices.  According to M.C. Vaish (1977), in his money, Banking as ”a persistent rise in the general price level brought about by high rates of expansion in aggregate money supply’.  To the lay man, inflation is the situation which occurs when there is plenty of money “chasing” very few goods.  Sit is a state of rising prices not only of high prices.

Inflationary prices tendencies may be due to  one or pa  combination of various types of inflation.  Such  types include: demand pull, cost push and structural inflation.

Demand pull inflation is easily arrested by monetary policy supply hence reducing purchasing power and consequently aggregate demand, while it is largely limited when it comes to dealing with the cost push and structural inflation.

Monetary instability caused by inflation remains the greatest problems militating against the proper growth of developing economics.  Economists suggest that economic with relatively stable prices them in one with fluctuating price levels. In a country that invest in productive activities, people prefer to invest in things they can sell much later, when the price must have risen astronomically.  Capital formation is impaired as there is no incentive to save.  The rate of inflation is higher than the real rate of interest making, the real rate is a negative aggregate.  Output, real income, and standard of living, all decline and the balance of payments tend to deficit because of a reduction in export and an increase in imports.

Monetary policy measures helps to stabilize prices by controlling the amount of money in circulation.  When demand pull inflation threatens, the monetary authorities mop up excess liquidity in an attempt to reduce aggregate demand as such, enhancing price stability.

 

BALANCE OF PAYMENT

No economy exists in isolation because no single economy can satisfy the trade of financial requirements of its populace.  David Ricardo formulated the theory that a country produces those goods which it has a comparative advantage in their production over other countries and buys those which it cannot produce from other nations.  This givens rise to transactions between countries which requires payments and receipts. Payments exceeding receipts results in a balance of payment dis-equilibrium and vice versa.  Dis-equilibrium in the balance of payment can adversely affect employment, price level and economic growth in the long run.  This can result in hardships being suffered by the population (as is the case in Nigeria).  Monetary policy however can be sued to correct the dis-equilibrium if properly applied.  If unfavourable balance of payments position exist i.e. a balance of payment deficit, by reducing the amount of money available for spending, importation activities are greatly curtailed.  Sectarian credit allocation can also be used to support infact industries in order to achieve import substitution.

In addition, the impact of monetary policy on the external sector is of crucial interested to very open economies such as Nigeria which has a relatively universities export basket.  With an open economy and only limited exchange rate flexibility, monetary policy actions that effect income may also effect the current account of the balance of payment through a change in import of goods and services.  Furthermore, changes in interest rates caused by the policy action may also impact the capital account of the balance of payment.  These threats of analysis are embodied in the monetary approach to the balance of payments.  According to this framework, a domestic access supply of money would end over time, to lead to a decline in met foreign assets of the banking system as agents seeking to adjust their portfolio, succeed in getting rid of the excess holding of money.  Similarly, a restrictive monetary stance leading to an excess demand for money would lead to a surplus in the balance of payments as agents seek to increase their money holding. The balance of payments within this analysis, essentially provides anavenue for adjusting money supply to money demand.

It is also important to point out that developments in the monetary sector influence and reflect the out come of the balance of payment. Hence, a large inflow in the balance of payments which is purely exogenous could sharply increase money supply unless the inflow can be sterilized to the extent necessary.

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