CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
For most economies, the objectives of monetary policy include price stability, maintenance of balance of payments equilibrium, promotion of employment and output growth, sustainable development. These objectives are necessary for the attainment of internal and external balance, and the promotion of long run economic growth. The importance of price stability derives from the harmful effect of price volatility which undermines the objectives. This is indeed a general consensus that domestic price fluctuations undermines the role of monetary values as a store of value, and frustrate investments and growth.
Ajayi and Ojo (1981) and fisher (1993), empirical states on inflation, growth and productivity have confirmed the long run inverse relationship between inflation and growth. When decomposed into its components, that is growth due to capital accumulation, productivity growth, and the growth rate of the labour force, the negative association between inflation and growth has been traced to the strong negative relationship between it and capital accumulation as well as productivity growth respectively. The importance of these empirical findings is that stable prices are essential for growth due to capital accumulation, productivity growth, and the growth rate of the labour force, the negative association between inflation and growth has been traced to the strong negative relationship between it and capital accumulation as well as productivity growth respectively. The importance of these empirical findings is that stable prices are essential for growth. The success of monetary policy depends on the operating economic environment, the institutional framework adopted, and the implementation of monetary policy is the responsibility of the central bank of Nigeria (CBN). The mandates of the CBN as specified by the CBN Act of 1958 include;
 Issuance of legal tender currency.
 Maintaining external reserves to safeguard the international value of the currency.
 Promoting monetary stability and a sound financial system.
 Acting as banker and financial adviser to the federal government.
However, the current monetary policy framework focuses on the maintenance of price stability while the promotion of growth and employment are the secondary goals of monetary policy. The performance of monetary policy depends on some legal framework upon which it operates. The legal framework are quantitative general or indirect and second, qualitative selective or direct. The effect effects the level of aggregate demand through the supply of money, cost of money and availability of credit. Out of the two types of instruments, the first category include bank are variations, open market operation, and required reserve ratio. They are meant to regulate the overall level of credit in the economy through commercial banks. The selective credit control aims at controlling specific types of credit. This includes changing margin requirement and regulation of consumer’s credit (M.L Jhingan, 2003).
In any economy, the conducts of both policies are normally rooted through banking institutions that play in the intermediation process. The role of bringing lenders and borrowers together through this process the central bank plays a very important role in determining the price of money (Ebhodaghe, 1996). Therefore, monetary policy is important in its own right from the past view of monetary economists and policy maker’s interns of its impacts on the economy. Of all tools available to government for directing the cause of the economy, monetary policies have proven to be the most visible instrument for achieving medium term stabilization objectives (CBN guideline 2002). Indeed monetary policy formulation and implementation emerged as a critical government responsibility so that the economy does not go astray. Policies are made not only for their own sake rather for achieving some desired goals over a given period of time.