1.1       Background of the Study

The subject of monetary policy in the economy is comparable to the indispensability of air to human existence on the earth planet. Based on this, it has attracted much attention among government (Central Bank of Nigeria), researchers and has more become a focus of economic analysis. This focus is attributed to the fact that monetary policy will only be effective if there is appropriate implementation, that is, stable money supply to enhance balanced economy and achievement of macroeconomic objectives.

There are particular ways of using words from different actors about the subject matter of monetary policy. Anyanwu (1993), stated that it is a measure design to regulate and control the volume, cost, availability and direction of credit and money in an economy to achieve some specified macroeconomic policy objectives. That is, it is a deliberate effort the monetary authorities (Central Bank) to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives.

Akatu, (1993) noted, that monetary policy in the Nigerian context encompasses actions of the central bank of Nigeria that affects the availability and cost of commercial, Merchant Banks, Reserve balances and there the overall monetary and credit conditions in the economy. The main objective of such actions is to ensure that over time, the expansion of money and credit will be adequate for the long-run needs of the growing economy at stable prices.

Monetary policy comprises of a combination of instruments and strategies used monetary authorities in controlling the supply of money in an economy consistent with a desired level of short term interest rate, inflation and economic growth in a growing economy. The choice of a monetary policy strategy is intertwined with the objectives of monetary policy which includes ensuring price (inflation, exchange rate and interest rate) and financial stability. Thus, the conduct of monetary policy and the goal of price stability lie within the mandate of central banks, which emphasizes the importance and appropriateness of a growing economy.

The study centers on the effect of monetary policy on the Nigeria economy. It is imperative to note that there have been controversies among economists as to the exact relationships between monetary policy measures and major aggregates. Several notable economists have undertaken studies to see to the root of such controversies but so far, there have been even more and more owing to their varying line of thought. These controversies have divided the economic into different schools of thought even present economists fixed themselves among these schools of thought namely.

  1. The classical school of thought
  2. The Keynesian school of though
  3. The monetarists
  4. The neo-Keynesian school
  5. The post-Keynesian school

The views of the classical economists are that economy automatically tends towards full employment and what is required is just manage the level of money supply in order to control inflation. The Keynesian economists however, acknowledged the importance of monetary policy but believe that fiscal policy is much more powerful and reliable and that increase in money supply will reduce the rate of interest.

To the monetarists, an increase in money supply will primarily increase aggregate demand for goods and services, and will have no effect on real output and employment. According to the monetarists, fluctuations experienced in the economy are caused the monetary authorities through variations in money supply.

From the foregoing, the research was borne out of fluctuations and shocks the economy of Nigeria has been experiencing. It also aimed at exposing the attempt taken government over the period under review (1970-2011). And also to know that monetary policy is crucial in understanding the behaviour of critical macroeconomic variable in Nigeria and other country. More so, it is important to know that with monetary policy tool, economy can be repositioned in its desired course.

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