The Impact of Monetary Policy And Price Stability In Nigeria

The Impact of Monetary Policy And Price Stability In Nigeria



This study empirically investigated the relationship between monetary policy and economic growth and stability in Nigeria, covering the period, 1981-2015. The Gross Domestic Product was used as an indicator of economic growth while the Consumer Price Index, the proxy for price stability regressed against five selected monetary policy instruments, namely, the Monetary Policy rate (MPR), Treasury Bill (TB), Liquidity Ratio (LR), Loan to Deposit Ratio (LDR) and Exchange Rate (ER).Employing the Vector Error Correction model (VECM) approach, the study revealed a significant relationship between monetary policy and economic growth and price stability in Nigeria. Study also confirmed the existence of long-run significant causal relationships between monetary policy and economic growth and price stability in Nigeria. Thus, the conclusion is that monetary policy as prescribed by the CBN today, appears to be working better in the long-run than the short-run, which may account for the recent intractable problems of foreign exchange rate that the economy is currently experiencing .Based on the findings, the study therefore recommends that the Central Bank of Nigeria should not only aim at stabilizing the price level, but also put some effort in growing the economy through the real sector; Nigeria should diversify the economy to reduce the dependence on oil. Nigeria should encourage domestic production and increase exportation to achieve the objective of economic stability and development.




Monetary policy is the macroeconomic policy laid down by the central bank. It is the policy of managing the economy to bring about sustainable economic growth and price stability. It also involves a deliberate action of the monetary authority to influence the quantity, cost, direction and availability of money and credit in order to achieve desired macroeconomic objectives. Monetary policy, therefore, is the process by which the Central Bank of a country controls money supply which usually targets at interest rate for the purpose of enhancing economic development (Nenbee and Madume, 2011).

In line with the foregoing above, the Central Bank of Nigeria since its inception is assumed to have been playing this role of ensuring price stability, maintain external reserves to safeguard the international value of Nigeria’s legal tender, promote sound financial system which are anchored

on the use of monetary policy towards the achievement of full employment, good standard of living and rapid economic growth (Ndekwu, 2013). Also, such policies in developing countries are designed to achieve price stability in the economy, stimulate growth and reduce poverty. In Nigeria the achievement of these objectives are predicated on the stance of fiscal and monetary policies. Over the years the major goal of monetary policy have often been the two later objectives thus inflation targeting and exchange rate policy which dominated the Central Bank of Nigeria’s monetary policy focus based on an assumption that these are essential tools of achieving macroeconomic stability (Aliyu and Englama,2009).

Before 1986 the economic environment that guided monetary policy was characterized by the dominance of the oil sector, the expanding role of the public in the economy and over dependence on the external sector. The use of market-based instruments was not feasible at that point because of the underdeveloped nature of the financial market and deliberate restraint on interest rate.

After 1986 however, with the Central Bank of Nigeria amended act, Adeoye, et al (2014) revealed that the apex bank was granted more discretion and autonomy in the conduct of monetary policy. Consequently, the focus of monetary policy during this period shifted significantly from growth and developmental objectives to price stability. However, the extent to which this has been achieved remains largely uncertain.

Ndekwu(2013) submitted that monetary policy impemented in recent years in Nigeria have been aimed at fast tracking economic reform programs with the objective of providing enabling financial system infrastructure and environment to support sustainable growth. The central bank through the deposit money banks implements policies that guarantee the orderly development of the economy through appropriate changes in the level of its various instruments of monetary policy which include the cash reserve ratio, liquidity ratio, open market operations and primary operation to influence the movement of reserve (Ndekwu, 2013).


Furthermore, the sectoral allocation of bank credit in CBN guideline was to stimulate the production sector and thereby stem inflationary pressure. The fixing of interest rate at relatively low level was done mainly to promote investment and growth. Occasionally special deposits were imposed to reduce the amount of free reserve and credit creating capacity of the bank. Minimum cash ratio were usually lower than those voluntarily maintained by the banks, they proved less effective as a restraint on their credit

operations (Adigwe, Echekoba and Onyeagba, 2015).



For most economies the objective of the monetary policy include price stability, maintenance of balance of payment equilibrium, promotion of employment and output growth, sustainable development (Folawewo and Osinubi, 2006). These objectives are necessary for the attainment of internal and external balance and the promotion of long run-economic growth and stability (Ndekwu, 2013).

But the contention among scholars is that the effectiveness of monetary policies in addressing these twin issues of economic growth and stability depends much on how the central bank and monetary authorities can accurately read the economic activities and prescribe adequate and timely manipulation of the monetary aggregates. Failure of these authorities in this direction often spells doom for the economy, so much so that monetary aggregates, at best fail to respond or do so with severe negative consequences. Regrettably, the situation with the Nigerian economy in terms of monetary policy effect is far from being fully investigated.

Consequently, the study is an empirical investigation on the relationship between monetary policy and economic growth and price stability in Nigeria, covering the period, 1981-2015.



Macroeconomic stability depends not only on the macroeconomic management of an economy but also on the structure of key market sectors. To enhance economic growth and price stability, there is need to support macroeconomic policy with structural reforms that will strengthen and improve the functioning of the markets and the appropriate sectors. Typically it is of equal importance to a country’s economic achievement to have a sound macroeconomic policies aimed at maintaining a conducive environment for long term investment in the economy.

Monetary policy is directed primarily at promoting long term economic growth; this is to be constantly re-evaluated to adapt to changing challenges and priorities over time.

The economy of Nigeria is faced with macroeconomic problems like low economic growth and high inflation rate and unemployment. Even with price stability being one of the main objectives of monetary policy in Nigeria, coupled with the adoption of various monetary regimes by the Central Bank of Nigeria over the years, Nigerian economy is still bedeviled with poor economic growth, inflation, unemployment, all culminating in unsatisfactory expansion of domestic output (Omoke and Ugwuanyi, 2010; Onyeiwu, 2012; Koshy, 2012; Michael and Ebibai, 2014).

Presently, there is this nagging issue of whether monetary policy is actually an effective instrument of economic growth and price stability or not, especially given the fact that monetary policy instruments have been in operation in Nigeria since the establishment of the Central Bank of Nigeria as the apex Bank with very little to show in terms of its performance in the economy. For instance, some commentators are of the opinion that monetary policy has not solved the major macroeconomic problems of economy. The Nigerian economy is also characterized by policy summersaults where monetary policies initiated by one administration are sometimes not continued or implemented by succeeding administrations. Sometimes monetary policy measures are not implemented at the appropriate time (Ebiringa, 2014; Nwoko, Ihemeje and Anumadu, 2016). Furthermore, it is believed that when monetary policy instruments are used in developed countries, the intended purposes are usually achieved and the populace strongly believes in the credibility of such policies thereby directing the economic actions and behaviors accordingly. The case seems however, not to be the same for developing countries because people see such pronouncements as mere rituals that may not have any impact on the economy (Okwo,Eze and Nwoha,2012;Bernhard,2013).

Against this background, this study empirically investigates the impact of monetary policy on economic growth and price stability of Nigeria, covering the period, 1981-2015.



The main objective of this research is to examine the influence of monetary policy on economic growth and price stability in Nigeria. Specifically, the study is to accomplish the following objectives;

  1. To determine the effect of monetary policy on economic growth in
  2. To ascertain that a long-run relationship exists between monetary policy and economic growth in
  3. To examine the impact of monetary policy on price stability in
  4. To ascertain that a long-run relationship exists between monetary policy and price stability in


On the basis of the above-stated objectives, this study therefore is to answer the following research questions;

  1. What is the influence of monetary policy on economic growth in Nigeria?
  2. To what extent has monetary policy led to significant long run economic growth in Nigeria?
  3. How has monetary policy affected price stability in Nigeria?
  4. To what extent has monetary policy led to significant long run price stability in Nigeria?


With the objectives of this study in mind and having raised the necessary research questions, the following research hypotheses were therefore formulated to guide the study;

H01: There is no significant relationship between monetary policy and economic growth in Nigeria.

H02: Monetary policy has no significant long-run relationship with economic growth in Nigeria.

H03: There is no significant relationship between monetary policy and price stability in Nigeria.

H04: Monetary policy has no significant long-run relationship with price stability in Nigeria


This study benefits many groups of individuals including bankers, investment analysts, government agencies, academics, private and the public sector. More so, it is useful to policy makers in the attempt to fashion out dynamic and reliable monetary policy measures for controlling commercial banks’ ability to create money and thereby influence the effective development of the economy.

The findings of this study are also beneficial to individuals, cooperate bodies, researchers and the government and its agencies at large. At the level of the corporate bodies or the individual level, it helps them understand the way the government conducts its monetary policy programs and so are better positioned to respond to such programs and policies. It also aids the government to predict with accuracy the impact of its monetary policy program on the economy at large. This research work also serves as a reference point for other researchers and the academics. Above all, it adds to existing stock of knowledge thereby filling up the

knowledge gap.


This work is aimed at examining the performance of monetary policy on the Nigerian economy, especially as it affects economic growth and price stability in Nigeria. This research work covers the period of 1981 to 2015.



In the way of limitations, no attempt is made to cover other aspects of the economy beyond the relationship between monetary policy and economic growth and price stability. Also, the work centres only on the Nigerian economy, and so does not extend to other economies of the world.



This study is divided into five chapters, with chapter one on the introduction, covering the background of the study, problem statement, objectives, research questions and hypotheses. Other sections include the significance of the research work, its scope and limitations.The chapter two covers mainly the literature review while chapters three and four

cover the methodology adopted for the study and its data presentation and analysis, respectively. In the final chapter, chapter five, the findings of the study are summarizes with conclusions drawn and recommendations made.

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