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We the undersigned hereby certify that this project was

carried out by ....................................... in the department

of business administration, school of business studies. We also

certify that the work is adequate in scope and quality in partial

fulfilment for the award of Higher National Diploma (HND) in

business administration. .

Project Supervisor

Center co-ordinator Date


This project work is dedicated to the Almighty God who gives

wisdom for academic excellent, and to my beloved husband

and my kids who did not deprive me from benefiting and

having the light of education.


I am most grateful to the Almighty God for giving me life,

strength and courage to sail through my educational career

despite all odds and obstacles.

In writing this project, I am indebted to my people for their

contributions; support and encouragement in making this

project work a success.

I will like to use this opportunity to express my sincere thanks

to my parents, brothers and sisters, relatives, friends and

loved ones for their prayers, moral and financial support

through this program.

My profound gratitude goes to my Supervisor Mr Emmanuel N.

Bassey who despite his crowded schedule, sacrificed time to

read through the manuscript without which this project would

not have seen the light of the day.

My special thanks also goes to center co-ordinator, Mrs

Ogbinaka, the registrar, Mrs Stella Oyabugbe, Mr and Mrs

Liya, Mr and Mrs Nwankolobia, Rev. and Anusem, anti Esther,

anti Muareen, bro Paul, Mr Mrs Elvis Abanum,Mrs Ajayi, Miss

Mercy for their advice, encouragement and assistance.

In like manner, I wish to acknowledge the effort of all my

lecturers in business admin. department for their principal

knowledge imparted on me during my period of study.

With special thanks to my beloved husband and kids for their

endless love shown to me during the course of my studies.

Finally, thanks to others I cannot remember during the course

of the write up, may God reward every effort of kindness and

love shown during my academic pursuit.


Generally, both fiscal and monetary policies seek at achieving relative

macroeconomic stability. Based on countries' experience on the role of

monetary policy in controlling economics instability, this study examines

the efficacy of monetary policy in controlling inflation rate and exchange

rate instability. The analysis performed is based on a rational

expectation framework that incorporates the fiscal role of exchange


In this research work, the researcher is focusing on monetary

policy and micro economic instability in Nigeria. The

researcher will consider in chapter one….the introduction of

the study which will in turn considers the following topics. The

background of the study, the statement of research problem,

the objective of the study, significance of the study, the

hypothesis and the structure of the work.

Chapter two focuses on the literature review; this chapter is

where the researcher extract materials from various books,

magazines, news papers and internet resources. In chapter

three, the researcher deals on research methodology while

chapter four is data analysis and interpretation. The finding,

summary and conclusion are in chapter five.



1.1 Background of the Study

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

(iii) cost of money or 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 primarily associated with interest rate

and credit. For many centuries there were only two forms

of monetary policy: (i) Decisions about coinage; (ii)

Decisions to print paper money to create credit. Interest

rates, while now thought of as part of monetary

authority, were not generally coordinated with the other

forms of monetary policy during this time. Monetary

policy was seen as an executive decision, and was

generally in the hands of the authority with seigniorage,

or the power to coin. With the advent of larger trading

networks came the ability to set the price between gold

and silver, and the price of the local currency to foreign

currencies. This official price could be enforced by law,

even if it varied from the market price.

With the creation of the Bank of England in 1694, which

acquired the responsibility to print notes and back them

with gold, the idea of monetary policy as independent of

executive action began to be established. The goal of

monetary policy was to maintain the value of the

coinage, print notes which would trade at par to specie,

and prevent coins from leaving circulation. The

establishment of central banks by industrializing nations

was associated then with the desire to maintain the

nation's peg to the gold standard, and to trade in a

narrow band with other gold-backed currencies. To

accomplish this end, central banks as part of the gold

standard began setting the interest rates that they

charged, both their own borrowers, and other banks who

required liquidity.

MPC meeting, 5th December, 2007 .

The Monetary Policy Committee of the CBN met on 5th

June, 2007 and decided to reduce the MPR by 200 basis

points, i.e from 10.0 per cent to 8.0 per cent. The width

of the interest rate corridor was also reduced from +/-

300 to +/-250 basis points. The implication of these

actions is that the deposit facility now stands at 5.5 per

cent while the lending facility would be 10.5 per cent,

both down from 7 and 13 per cent, respectively.

1. MPC meeting, 3rd October, 2007

The Monetary Policy Committee of the CBN met on 3rd

October, 2007 and decided to raise the MPR to 9.0 per

cent which would be the repo rate and the rate at which

the CBN lends to banks. The deposit money banks'

deposits with the CBN will no longer earn interest. There

measures are intended, amongst others to deepen inter-

bank trading and encourage banks to free-up resources

to encourage credit market.

Additional Committees Set Up To Enhance

Formulation Of Monetary Policy

The newly constituted Fiscal Liquidity Assessment

Committee (FLAC) has the mandate to design and

regularly update the framework for obtaining information

for forecasting fiscal liquidity. Another committee is the

Liquidity Assessment Group (LAG) which takes decision

on intervention in domestic money and foreign exchange


2. Fiscal liquidity Assessment Committee (FLAC)

The Committee shall be made up of CBN Departments

that have responsibility for monetary policy formulation,

operations and monitoring; and ministries, departments

and agencies of the Federal Government involved in

fiscal operations.

Chairman: The MPD will serve as Chairman.

Members: The membership shall consist of the following

department. MPD, BOD, TED, RSD, FOD, from the bank;

FMF, Budget Office, customs & Excise, FIRS, NNPC, DPR,

OAGF, from government.

Functions: The Committee shall be responsible for:

• Daily collection and update of liquidity data

arising from government fiscal operations –

injections (expenditures) and withdrawals

(revenues) particularly information on float and any

intending operations that have liquidity implications

– through the desk officers of the relevant

departments for the use of MPD in determining the

system liquidity. FLAC shall also forward the

forecast fiscal liquidity to the liquidity Assessment


• Assembling all available information on

projected revenue and expenditure for the near


• Making daily and monthly

projection/forecasting to determine the net fiscal

injection and withdrawal of liquidity to the system.

Meeting: The FLAC meet daily in the morning. However,

where the physical meeting may not take place, it is

expected that the Committee members would contact

one another through phone, e-mail e.t.c.

2. Liquidity Assessment Group (LAG)

Chairman : The Director, Banking Operations

Department shall serve as Chairman with Director, Trade

and Exchange Department as alternate Chairman.

Members: the Group shall be made up of CBN

departments involved in the conduct of monetary policy.


Functions: The Group would take decisions on

intervention in domestic money and foreign exchange

markets; and the mode and measure of such

intervention required to achieve optimum system

liquidity position.

In specific terms, the LAG shall be responsible for making

suggestions on policy actions to be taken by the Group

each day in both forex and domestic money market


• The need for intervention

• Timing of intervention

• Size, type and tenor of instruments

• LAG shall also decide the choice of market

through which intervention should be undertaken

(whether domestic money market or forex market).

• The LAG shall communicate its decision to the

MPIC Chairman by 9.00 am every morning

• The DG shall obtain approval from the

Governor by 9.15 am

• The LAG will build a data base on its

expectations on daily /weekly/monthly/yearly basis

to facilitate forecasts.

• LAG will follow up implementation of policy

measures and report to MPIC

Meeting : The group shall meet at 8.45 am daily.

Liquidity Position: June, 2007

The Bank sustained its market driven approach to ensure

that the reserve money targets under the Policy Support

Instrument ( PSI ) programme were achieved in the first

half of 2007. Reserve money rose from N841.25 billion in

March, 2007, to N902.40 billion in May 2007, showing an

increase of N61.15 billion and excess liquidity of N42. 40

billion. However, at end-June, 2007, reserve money was

N858.20 billion compared with the target of N860 billion.

The attainment of the programme target in the second

quarter reflected the effect of the intensive liquidity mop-

up operations through the use of both the money market

and foreign exchange instruments.

1.2 Statement of the Research Problem

Monetarist macroeconomists have sometimes advocated

simply increasing the monetary supply at a low, constant

rate, as the best way of maintaining low inflation and

stable output growth. A central bank can only operate a

truly independent monetary policy when the exchange

rate is floating. If the exchange rate is pegged or

managed in any way, the central bank will have to

purchase or sell foreign exchange. Monetary decisions

today take into account a wider range of factors, such


• short term interest rates;

• long term interest rates;

• velocity of money through the economy;

• exchange rates;

• credit quality;

• bonds and equities (corporate ownership and


• government versus private sector


• international capital flows of money on large


• financial derivatives such as options, swaps,

futures contracts, etc.

1.3 Research objectives

Over the years, the objectives of monetary policy have

remained the attainment of internal and external balance

of payments. However, emphasis on

techniques/instruments to achieve those objectives have

changed over the years. There have been two major

phases in the pursuit of monetary policy, namely, before

and after 1986. The first phase placed emphasis on direct

monetary controls, while the second relies on market


Monetary Policy Performance in 2007

The framework for monetary policy management in 2007

remained that of monetary targeting. The Central Bank

of Nigeria (CBN) adopted various policy measures aimed

at containing the growth of monetary aggregates in order

to achieve monetary and price stability. Open Market

Operations (OMO) remained the major tool of liquidity

management. Other policy measures included increased

issuance of treasury securities in the primary market to

mop-up excess liquidity; use of deposit and lending

facility to encourage inter-bank transactions as well as

special sales of foreign exchange, including swap

arrangements. NTBs of various tenors (91-, 182- and

364-day were auctioned during the period. In this

research work, the major objective is the analysis of

monetary policy and microeconomic instability in Nigeria.

1.4 Significance of the study.

This research will be of great interest and benefit to the


1. The manager and chief executives of any company.

2. Producers, intermediaries, as well as management,


3. The students of marketing, accounting, economics and

business administration.

4. Likewise to aspiring businessmen and entrepreneur.

5. The diverse group of people and the dynamic

marketing partners as well as the society at large. The

diversified group of people above, must know how to

adapt to the marketing strategies, new technologies etc

6. Policy makers in government

7. Legal advisers

1.5 Hypothesis

It is a conjectural statement of the relationships between

two or more variables. It is testable, tentative problem

explanation of the relationship between two or more

variables that create a state of affairs or phenomenon.

E,C, Osuola (1986 page 48) said hypothesis should

always be in declarative sentence form, and they should

relate to them generally or specially variable to variables.


1. Explain observed events in a systematic manner

2. Predict the outcome of events and relationships

3. Systematically summarized existing knowledge.

In essence, there exist NULL HYPOTHESIS set up only to

nullify the research hypothesis and the ALTERNATIVE

HYPOTHESIS for the purpose of the study. For the

efficiency of the study, the hypothesis is as follows:

Null Hypothesis (HO)

1. Monetary policy does not rest on the relationship

between the rates of interest in an economy.

2.` Monetary policy is not one of the tools that a

national/federal Government uses to influence its


Alternative Hypothesis(HI)

1. Monetary policy rests on the relationship between the

rates of interest in an economy.

2. Monetary policy is one of the tools that a

national/federal Government uses to influence its



This work was carried out under a tight schedule of

school pressure and work load which makes it absolutely

necessary to devote limited time to do it, having

sleepless night etc.

Another problem encountered is finance, the cost of

transportation in carrying out the investigation.

Individual differences in responses to questionnaire are

also a limitation encountered.

The Questionnaire method of primary data collection was

limited to the verbal responses of subjects to pre-arrange

questions. It also had limitation that its usefulness

depended on the level of education of the subjects. There

was the limitation of the problem of memory in

remembering past facts. The structured nature of the

questionnaire may compel the respondents to give

answers that they do not fully endorse, There was the

limitation of the rigidity of the research instrument,

which diminishes the amount of information that could be


There was the limitation that the cost of administering

the questionnaire was very high due to high

administrative, personnel and traveling costs especially

when some of the respondents were initially not on their

seats. There was the limitation that the researcher and

the field data collectors were not policemen and so they

could not force some of the respondents if they refuse to

give answers. There was also the limitation of the

scarcity of time and money resources. In nutshell, we

want to mellow down this point to the following subtopics

Material Procurement

There was a lot constraints as to getting information and

materials for the job. The researcher made series of

consultations and visit to most renowned institutions to

acquire the needed information. Most materials used

were very difficult to come by, as there is no library

within the town.

Time Constraints

Combining academic work with job is no doubt a thought

provoking issue, as it has to do with time. Actually, a lot

of time was wasted as the researcher visited the

organizations and individuals together with government

agencies to obtain valuable information for the project.

Financial Constraints

The researcher would have obtained more information

than what is obtainable here but due to lack of money to

visit some of the firms and government agencies located

a bit farther from the researcher place of resident.


This research work is to be organized in five chapters as


1. Introduction

2. Review of Related Literature

3. Research Methods and Producers

4. Data presentation and Analysis and

5. Summary, Findings, Conclusion and Recommendation



2.1 Monetary Policy before 1986.…………………..

The economic environment that guided monetary policy

before 1986 was characterized by the dominance of the

oil sector, the expanding role of the public sector in the

economy and over-dependence on the external sector. In

order to maintain price stability and a healthy balance of

payments position, monetary management depended on

the use of direct monetary instruments such as credit

ceilings, selective credit controls, administered interest

and exchange rates, as well as the prescription of cash

reserve requirements and special deposits. The use of

market-based instruments was not feasible at that point

because of the underdeveloped nature of the financial

markets and the deliberate restraint on interest rates.

The most popular instrument of monetary policy was the

issuance of credit rationing guidelines, which primarily

set the rates of change for the components and

aggregate commercial bank loans and advances to the

private sector. The sectoral allocation of bank credit in

CBN guidelines was to stimulate the productive sectors

and thereby stem inflationary pressures. The fixing of

interest rates at relatively low levels was done mainly to

promote investment and growth. Occasionally, special

deposits were imposed to reduce the amount of free

reserves and credit-creating capacity of the banks.

Minimum cash ratios were stipulated for the banks in the

mid-1970s on the basis of their total deposit liabilities,

but since such cash ratios were usually lower than those

voluntarily maintained by the banks, they proved less

effective as a restraint on their credit operations.

From the mid-1970s, it became increasingly difficult to

achieve the aims of monetary policy. Generally,

monetary aggregates, government fiscal deficit, GDP

growth rate, inflation rate and the balance of payments

position moved in undesirable directions. Compliance by

banks with credit guidelines was less than satisfactory.

The major source of problems in monetary management

were the nature of the monetary control framework, the

interest rate regime and the non-harmonization of fiscal

and monetary policies. The monetary control framework,

which relied heavily on credit ceilings and selective credit

controls, increasingly failed to achieve the set monetary

targets as their implementation became less effective

with time. The rigidly controlled interest rate regime,

especially the low levels of the various rates, encouraged

monetary expansion without promoting the rapid growth

of the money and capital markets. The low interest rates

on government debt instruments did not sufficiently

attract private sector savers and since the CBN was

required by law to absorb the unsubscribed portion of

government debt instruments, large amounts of high-

powered money were usually injected into the economy.

In the oil boom era, the rapid monetization of foreign

exchange earnings resulted in large increases in

government expenditure which substantially contributed

to monetary instability. In the early 1980s, oil receipts

were not adequate to meet increasing levels of demands

and since expenditures were not rationalised,

government resorted to borrowing from the Central Bank

to finance huge deficits. This had adverse implications for

monetary management

2.2 Monetary Policy Since 1986.……………………………

The Structural Adjustment Programme (SAP) was

adopted in July, 1986 following the crash in the

international oil market and the resultant deteriorating

economic conditions in the country. It was designed to

achieve fiscal balance and balance of payments viability

by altering and restructuring the production and

consumption patterns of the economy. These would be

achieved by eliminating price distortions, reducing heavy

dependence on crude oil exports and consumer goods

imports, enhancing the non-oil export base and achieving

sustainable growth. Other aims were to rationalise the

role of the public sector and accelerate the growth

potentials of the private sector. The main strategies of

the programme were the deregulation of external trade

and payments arrangements, the adoption of a market-

determined exchange rate for the Naira, substantial

reduction in complex price and administrative controls

and more reliance on market forces as a major

determinant of economic activity.

The objectives of monetary policy since 1986 remained

the same as in the earlier period, namely: the

stimulation of output and employment, and the

promotion of domestic and external stability. In line with

the general philosophy of economic management under

SAP, monetary policy was aimed at inducing the

emergence of a market-oriented financial system for

effective mobilization of financial savings and efficient

resource allocation. The main instrument of the market-

based framework is the open market operations. This is

complemented by reserve requirements and discount

window operations. The adoption of a market-based

framework such as OMO in an economy that had been

under direct control for long, required substantial

improvement in the macroeconomic, legal and regulatory


In order to improve macroeconomic stability, efforts were

directed at the management of excess liquidity; thus a

number of measures were introduced to reduce liquidly

in the system. These included the reduction in the

maximum ceiling on credit growth allowed for banks; the

recall of the special deposits requirements against

outstanding external payment arrears to CBN from

banks, abolition of the use of foreign

guarantees/currency deposits as collaterals for Naira

loans and the withdrawal of public sector deposits from

banks to the CBN. Also effective August, 1990, the use of

stabilization securities for purposes of reducing the

bulging size of excess liquidity in banks was re-

introduced. Commercial banks' cash reserve

requirements were increased in 1989, 1990, 1992, 1996

and 1999.

The rising level of fiscal deficits was identified as a major

source of macroeconomic instability. Consequently,

government agreed not only to reduce the size of its

deficits but also to synchronize fiscal and monetary

policies. By way of inducing efficiency and encouraging a

good measure of flexibility in banks' credit operations,

the regulatory environment has improved. Consequently,

the sector-specific credit allocation targets were

compressed into four sectors in 1986, and to only two in

1987. From October, 1996, all mandatory credit

allocation mechanisms were abolished. The commercial

and merchant banks were subjected to equal treatment

since their operations were found to produce similar

effects on the monetary process. Areas of perceived

disadvantages to merchant banks were harmonized in

line with the need to create a conducive environment for

their operations. The liquidity effect of large deficits

financed mainly by the Bank led to an acceleration of

monetary and credit aggregate in 1998, relative to

stipulated targets and the performance in the preceding

year. Outflow of funds through the CBN weekly foreign

exchange transaction at the Autonomous Foreign

Exchange Market (AFEM) and, to a lesser extent, at Open

Market Operation (OMO) exerted some moderating


The reintroduction of the Dutch Auction system (DAS) of

foreign exchange management in July, 2002 engendered

relative stability, and stemmed further depletion of

reserves during the second half of 2002. However, the

financial system was typically marked by rapid expansion

in monetary aggregates, particularly during the second

half of 2000, influenced by the monetization of enhanced

oil receipts. Consequently, monetary growth accelerated

significantly, exceeding policy targets by substantial

margins. Savings rate and the inter-bank call rates fell

generally due to the liquidity surfeit in the banking

system though the spread between deposit and lending

rates remained wide.

2.3 Implication Of The New CBN Act On The

Formulation Of Monetary Policy

In line with the CBN Act, 2007, one of the principal

functions of the Central Bank of Nigeria is to “ensure

monetary and price stability” In order to facilitate the

attainment of the objective of price stability and to

support the economic policy of the Federal government,

the Act provides the constitution of a Monetary Policy

Committee (MPC) which will comprise the Governor as

the Chairman, 4 Deputy Governor's two members of the

Board of Directors of the Bank, three members appointed

by the President and 2 members appointed by the


The implication for the formulation of monetary policy is

that with the new mandate derived from the CBN Act and

the composition of the MPC, monetary policy credibility of

the Bank will be strengthened. This is because monetary

policy will now be conducted in a more open and forward

looking way.

2.4 Trends in central banking

The central bank influences interest rates by expanding

or contracting the monetary base, which consists of

currency in circulation and banks' reserves on deposit at

the central bank. The primary way that the central bank

can affect the monetary base is by open market

operations or sales and purchases of second hand

government debt, or by changing the reserve

requirements. If the central bank wishes to lower interest

rates, it purchases government debt, thereby increasing

the amount of cash in circulation or crediting banks'

reserve accounts. Alternatively, it can lower the interest

rate on discounts or overdrafts (loans to banks secured

by suitable collateral, specified by the central bank). If

the interest rate on such transactions is sufficiently low,

commercial banks can borrow from the central bank to

meet reserve requirements and use the additional

liquidity to expand their balance sheets, increasing the

credit available to the economy. Lowering reserve

requirements has a similar effect, freeing up funds for

banks to increase loans or buy other profitable assets.

2.5 Developing countries

Developing countries may have problems establishing an

effective operating monetary policy. The primary

difficulty is that few developing countries have deep

markets in government debt. The matter is further

complicated by the difficulties in forecasting money

demand and fiscal pressure to levy the inflation tax by

expanding the monetary base rapidly. In general, the

central banks in many developing countries have poor

records in managing monetary policy. This is often

because the monetary authority in a developing country

is not independent of government, so good monetary

policy takes a backseat to the political desires of the

government or are used to pursue other non-monetary

goals. For this and other reasons, developing countries

that want to establish credible monetary policy may

institute a currency board or adopt dollarization. Such

forms of monetary institutions thus essentially tie the

hands of the government from interference and, it is

hoped, that such policies will import the monetary policy

of the anchor nation.

Recent attempts at liberalizing and reforming the

financial markets (particularly the recapitalization of

banks and other financial institutions in Nigeria and

elsewhere) are gradually providing the latitude required

in order to implement monetary policy frameworks by

the relevant central banks.

2.6 Types of monetary policy

In practice, all types of monetary policy involve

modifying the amount of base currency (M0) in

circulation. This process of changing the liquidity of base

currency through the open sales and purchases of

(government-issued) debt and credit instruments is

called open market operations.

Constant market transactions by the monetary authority

modify the supply of currency and this impacts other

market variables such as short term interest rates and

the exchange rate.

The distinction between the various types of monetary

policy lies primarily with the set of instruments and

target variables that are used by the monetary authority

to achieve their goals.

Monetary Policy: Target Market Variable: Long Term Objective:

Inflation Targeting Interest rate on overnight debt A given rate of change in the CPI
Price Level Targeting Interest rate on overnight debt A specific CPI number
Monetary Aggregates The growth in money supply A given rate of change in the CPI
Fixed Exchange Rate The spot price of the currency The spot price of the currency
Gold Standard The spot price of gold Low inflation as measured by the gold price
Mixed Policy Usually interest rates Usually unemployment + CPI change

2.7 Types of monetary policy

The different types of policy are also called monetary

regimes, in parallel to exchange rate regimes. A fixed

exchange rate is also an exchange rate regime; The Gold

standard results in a relatively fixed regime towards the

currency of other countries on the gold standard and a

floating regime towards those that are not. Targeting

inflation, the price level or other monetary aggregates

implies floating exchange rate unless the management of

the relevant foreign currencies is tracking the exact same

variables (such as a harmonized consumer price index).

Inflation targeting

Under this policy approach the target is to keep inflation,

under a particular definition such as Consumer Price

Index, within a desired range.

The inflation target is achieved through periodic

adjustments to the Central Bank interest rate target. The

interest rate used is generally the interbank rate at which

banks lend to each other overnight for cash flow

purposes. Depending on the country this particular

interest rate might be called the cash rate or something


The interest rate target is maintained for a specific

duration using open market operations. Typically the

duration that the interest rate target is kept constant will

vary between months and years. This interest rate target

is usually reviewed on a monthly or quarterly basis by a

policy committee.

Changes to the interest rate target are made in response

to various market indicators in an attempt to forecast

economic trends and in so doing keep the market on

track towards achieving the defined inflation target. For

example, one simple method of inflation targeting called

the Taylor rule adjusts the interest rate in response to

changes in the inflation rate and the output gap. The rule

was proposed by John B. Taylor of Stanford University.

The inflation targeting approach to monetary policy

approach was pioneered in New Zealand.

Price level targeting

Price level targeting is similar to inflation targeting

except that CPI growth in one year is offset in

subsequent years such that over time the price level on

aggregate does not move.

2.8 Fixed exchange rate

This policy is based on maintaining a fixed exchange rate

with a foreign currency. There are varying degrees of

fixed exchange rates, which can be ranked in relation to

how rigid the fixed exchange rate is with the anchor


Under a system of fiat fixed rates, the local government

or monetary authority declares a fixed exchange rate but

does not actively buy or sell currency to maintain the

rate. Instead, the rate is enforced by non-convertibility

measures (e.g. capital controls, import/export licenses,

etc.). In this case there is a black market exchange rate

where the currency trades at its market/unofficial rate.

Under a system of fixed-convertibility, currency is bought

and sold by the central bank or monetary authority on a

daily basis to achieve the target exchange rate. This

target rate may be a fixed level or a fixed band within

which the exchange rate may fluctuate until the

monetary authority intervenes to buy or sell as necessary

to maintain the exchange rate within the band. (In this

case, the fixed exchange rate with a fixed level can be

seen as a special case of the fixed exchange rate with

bands where the bands are set to zero.)

Under a system of fixed exchange rates maintained by a

currency board every unit of local currency must be

backed by a unit of foreign currency (correcting for the

exchange rate). This ensures that the local monetary

base does not inflate without being backed by hard

currency and eliminates any worries about a run on the

local currency by those wishing to convert the local

currency to the hard (anchor) currency.

2.9 Gold standard

The gold standard is a system in which the price of the

national currency as measured in units of gold bars and

is kept constant by the daily buying and selling of base

currency to other countries and nationals. (i.e. open

market operations, cf. above). The selling of gold is very

important for economic growth and stability.

The gold standard might be regarded as a special case of

the "Fixed Exchange Rate" policy. And the gold price

might be regarded as a special type of "Commodity Price


2.10 Monetary policy tools

Monetary base
Monetary policy can be implemented by changing the

size of the monetary base. This directly changes the total

amount of money circulating in the economy. A central

bank can use open market operations to change the

monetary base. The central bank would buy/sell bonds in

exchange for hard currency. When the central bank

disburses/collects this hard currency payment, it alters

the amount of currency in the economy, thus altering the

monetary base.

Reserve requirements
The monetary authority exerts regulatory control over

banks. Monetary policy can be implemented by changing

the proportion of total assets that banks must hold in

reserve with the central bank. Banks only maintain a

small portion of their assets as cash available for

immediate withdrawal; the rest is invested in illiquid

assets like mortgages and loans. By changing the

proportion of total assets to be held as liquid cash, the

Federal Reserve changes the availability of loanable

funds. This acts as a change in the money supply.

Central banks typically do not change the reserve

requirements often because it creates very volatile

changes in the money supply due to the lending


Discount window lending

Many central banks or finance ministries have the

authority to lend funds to financial institutions within

their country. By calling in existing loans or extending

new loans, the monetary authority can directly change

the size of the money supply.

Interest rates

The contraction of the monetary supply can be achieved

indirectly by increasing the nominal interest rates.

Monetary authorities in different nations have differing

levels of control of economy-wide interest rates. In the

United States, the Federal Reserve can set the discount

rate, as well as achieve the desired Federal funds rate by

open market operations. This rate has significant effect

on other market interest rates, but there is no perfect

relationship. In the United States open market operations

are a relatively small part of the total volume in the bond

market. One cannot set independent targets for both the

monetary base and the interest rate because they are

both modified by a single tool — open market operations;

one must choose which one to control.

In other nations, the monetary authority may be able to

mandate specific interest rates on loans, savings

accounts or other financial assets. By raising the interest

rate(s) under its control, a monetary authority can

contract the money supply, because higher interest rates

encourage savings and discourage borrowing. Both of

these effects reduce the size of the money supply.

Currency board

A currency board is a monetary arrangement which pegs

the monetary base of a country to that of an anchor

nation. As such, it essentially operates as a hard fixed

exchange rate, whereby local currency in circulation is

backed by foreign currency from the anchor nation at a

fixed rate. Thus, to grow the local monetary base an

equivalent amount of foreign currency must be held in

reserves with the currency board. This limits the

possibility for the local monetary authority to inflate or

pursue other objectives. The principal rationales behind a

currency board are three-fold:

1. To import monetary credibility of the anchor


2. To maintain a fixed exchange rate with the

anchor nation;

3. To establish credibility with the exchange rate

(the currency board arrangement is the hardest

form of fixed exchange rates outside of


In theory, it is possible that a country may peg the local

currency to more than one foreign currency; although, in

practice this has never happened (and it would be a

more complicated to run than a simple single-currency

currency board). A gold standard is a special case of a

currency board where the value of the national currency

is linked to the value of gold instead of a foreign





The research method selected for the study is a

combination of a survey and an industrial study. The

survey research method is described hereunder that:

(i) It is a design in which primary data is gathered from

members of the sample that represents a specific


(ii) It is a design in which a structure and systematic

research instrument like a questionnaire or an interview

schedule is utilized together with the primary data;

(ii) It is a method in which the researcher manipulates no

explanatory variables because they have already

occurred and so they cannot be manipulated;

(iii) Data are got directly from the subjects;

The subjects give the data the natural settings of their


(iv) The answers of the respondents are assumed to be

largely unaffected of the content in which they are


(v) The impacts of the confounding factors are “controlled”

statistically; and

(vi) The aim of the research may span from the

exploration phenomena to hypotheses testing (stone


The survey research method has some merit, which are

to be articulated hereunder: In the survey research

method, the sample of the respondents are selected in

such a way as to make it low due to the utilization of big

sample sizes, which results in generally low sample


The survey research method also has the merit that data

collection takes place in the “natural” settings of the

workplace rather than an activated laboratory. Data are

got directly from the respondents. The advantage that

the survey yields data that suggests new hypothesis is

very illuminating. There is also the merit that a set of

systematic data collection instruments such as

questionnaire interview schedules and observation

gadgets can either be used alone or in conjunction with

other instruments (stone, 1995).


Spiegel (1992) observes that sampling theory is a study

of the relationship existing between a population or

universe and the samples drawn from it. The population

in this study is from the senior junior staff of the firms.

In order to make conclusions of sample theory and

statistical references to be valid, a sample must be

selected as to be representative of the population

(Spiegel,1992). One way in which a representative

sample may be got, is by the process of stratified

random sampling. In this research work, the technique of

simple random sampling is used to select the sample of

100 respondents from each group of the personnel,

making a total sample size of 200.

The list of all senior and junior staff of the firm is from

the personnel department of the company. The numbers

were written on a piece of paper, put in a basket and the

papers were folded to cover the numbers and one of the

pieces of paper was selected at a time without replacing

it and any name corresponding to the number becomes a

number of the sample. This method of sampling without

replacement was done until the sample of 100

respondents per group of personnel was arrived at.

3.3 Population

The population, in this study is the totality of the senior

and junior staff of Nigeria Labour Congress (Delta State

Chapter. Warri.

The sample size is 200 and this number of respondents

was chosen from the population. The rationale for

studying a sample rather than the population includes


1. Most empirical research work in the social science

involves studying a sample in place of the population.

2. Statistical Laws reveal that statistics composed

from the sample data are usually reasonably accurate.

3. Luckily, it is usually possible to estimate the level

of confidence that can be placed on the results.

We should note that above is only possible if the

probability sample size is large enough.



As earlier stated, the primary data collection instrument

in this study is the questionnaire. In the questionnaire

method of primary data collection, heavy dependence is

placed on verbal reports from the subjects to get

information on the earnings per share and standard set.

The questionnaire has a lot of merits. It needs less skill

to administer. Questionnaire can be administered to a big

number of individuals at the same time. Also with a

specific research budget, it is usually possible to cover a

broader area. The impersonal nature of a questionnaire,

its structure and standardized wording, its order of

question, its standardized instructions for recording

answers might make one to conclude that it offers some

uniformity from one measurement occasion to another

(Selltiz et al, 1976).

Another merit of questionnaire is that subjects may have

a bigger confidence in their anonymity, and thus feel

freer to express views they feel might be disapproved.

Another attribute of the questionnaire that is sometimes,

though not always desirable is that it might place less

pressure on the subjects for immediate response (Selltiz

et al, 1976).

The questionnaire also has some demerits. It has noted

that for purpose of giving dependable responses to a

questionnaire, respondents must be considerably

educated. Thus one of the demerits of the usual

questionnaire is that it is appropriate only for with a

considerable amount of education. There is also demerit

that subject may be reluctant and unable.

To report on the particular subject matter. Also, if a

subject misinterprets a question or give his or her

answer in a batting manner, there is often a little that

can be done to ameliorate the situation. In a

questionnaire, the information the researcher gets is

limited to the fixed alternative answer format, when a

specific answer is not available, it can lead to error

(Selltiz, 1976).

There is also limitation of memory in reporting on past

facts. The researcher is not a policeman that can compel

answers. That is, the information may not be readily

accessible to subject and thus the subject may be

reluctant to put forth enough alternative information that

he or she is only barely conscious of (Selltiz et al, 1996).

In this research project, a structured and undisguised

questionnaire is utilized which is made up of two parts

namely, the personal data section and the section on the

data on the actual subject matter of the work. The

questionnaire was undisguised in the sense that the

purpose of the data collection which was to collect

primary data for writing up the researcher’s HND project

was made know to the 200 respondents. The

questionnaire was structured in the sense the questions

are logically sequenced and are to be asked to the

respondents in the same manner and no follow up

questions are to be allowed. Some of the questions are of

the fixed alternative answer format type.

Ten (10) of the questions have yes or no answers,

Ten (10) of the questions have alternative answer for the

respondents to tick.

The structured questionnaire has the merit that it yields

data that is easier to analysis than data produced by an

unstructured questionnaire. Also the structured nature

diminishes both researcher’s and research instrument

biases. It however has the demerit that the rigidity of the

research instrument diminishes the amount of

information that could be got.


The method of communication of the research instrument

is by means of the personal interview. The method has

the merit that it produces a better sample of the

population than either mail or the telephone methods. It

also has the merit that it gives a very high completion

and response rates. It has the merit that the interview

has a bigger sensitively misunderstandings by the

respondents and gives a chance for clarification of

misunderstood questions. It has the merit that it is a

very feasible method (Selltiz et al, 1976). The personal

interview method has the demerit that it is more costly

than the mail or the telephone methods of

communication of a questionnaire.


In addition to questionnaire and face-to face interviews,

observation was also carried out. This was to enable the

researcher to witness by herself the officers of this firm

and to interact with these people.


The researcher and three other field data collectors did

the fieldwork. The field data collectors were other

classmates also offering the Part-time HND program,

who have also offered research methodology. They had

no problem gaining entrance into the office under

consideration since one of them has a friend working

there. They were to be trained by the researcher on how

to greet the respondents and how to tick the

questionnaire correctly and honestly.



The data presentation tools are simple bar charts,

histograms, and pictorial tables. The most important

parts of a table include;

(a) Table numbers

(b) Title of the table

(c) Caption

(d) Stub or the designation of the rows and columns

(e) The body of the table.

(f) The head note or prefatory note or explanatory just

before the title.

(g) Source note, which refers to the literally or scientific

source of the table (Mills and Walter 1995)

Anyiwe (1994) has observed that a table has the

following merits over a prose information that;

(f) A table ensure an easy location of the required


(g) Comparisons are easily made utilizing a table than a

prose information;

(h) Patterns or trends within the figures which cannot

be visualized in the prose information can be revealed

and better depicted by a table; and

A table is more concise and takes up a less space than a

prose formation:

The data is to be analysed by means of percentage, cross

tabulation and the chi-square test of population

proportions for testing the two hypothesis. Percentages

express the ratio of two sets of data to a common base

of 100. The researcher made us of the computer

program called SPSS (statistical package for social

science) to carry out the computation of the hypothesis


3.7 Limitation of The Study

Research work is subject to one form of limitation or the

other, mine is not an exemption.

It was the initial thought of the researcher that the

exercise was easy but the contrary was the case. As a

student, several academic demands compete with the

limited but precious time available.

This implies that none of the competing exercise could be

effectively handled without the others being worse off.

This was my situation. Although the time expended was

too small to do justice to the study. The opportunity cost

in terms of other equally important activities forgone or

cursorily attended to, was made.

The researcher faces some embarrassment arising from

low-level educated staff who could not understand the

essence of the research work as this.




In the previous chapter, the research methods and

procedures have been handled. In this chapter the data

presentation and analysis are to be done. The data is to

be presented by means of tables, two simple bar charts,

one histogram and one pie chart to make it amenable for

further analysis. By analysis is meant the act of noting

relationship and aggregating the set of variables with

similar attributes and also breaking the unit of their

components (Mills and Walters 1995).

In this research work, the research accepts the

contention of Podsakoff and Dalton (1995) that the

factual information from the data can be used as a basis

for reasoning, calculation and discussion.

Apart from the heading above, the other headings in this

chapter include:

Data Presentation,

Percentage analysis

Cross-tabulated analysis

Hypothesis testing



Male 150
Female 50
Total 200
2 Marital Status subtended
Married 130 in degree
Single 70
Total 200

21-30 years 90
31-40 years 90
41-50 years 10
51-60 years 10
Total 200

OND 30 54
HND 80 144
NIM 20 36
TOTAL 200 360

The marital statuses of the 200 respondents it is found that

130 of them are married while 70 of them are single. For

the ages of the 200 respondents they are 21-30 years, 31-

40 years, 40-50 years, 51-60 years with frequency of

90,10 respectively. For the educational qualification of the

200 respondents they are diploma, OND, HND, First

Degree, Second Degree, NIM. and they have frequencies of

10, 30, 80, 20, 40 and 20 respectively.

Figure 4.1 below shows the simple bar chart of the data on

the sex of the respondents.









60 --

40 -

0 -


Frequency percentage Valid Cumulative
Percent Percent
MAIL 150 75.0 75.0 75.0
FEMALE 50 25.0 25.0 100.0
Total 200 100.0 100.0

Source: from data in table 1 (generated from SPSS) statistical
package for social science.

From figure 4.1 above, it is shown that male respondents

have the modal frequency of 150 out of the 200

respondents while the female respondents have the

frequency of 50 of them.

Figure 4.2 below shows the simple bar chart of the data

on the marital statuses of the respondents.



140 -

120 -

100 -

80 -
60 -
40 -
20 -
0 -
Marital status


Status frequency Percentage Valid Cumulative

Percent Percent
MARRIED 130 65.0 65.0 65.0
SINGLE 70 35.0 35.0 100.0
Total 200 100.0 100.0

From figure 4.2 above, it is shown that the married respondents

have the modal frequency of 130 out of the 200 respondents while

the single respondents have the frequency of 70 of them.






1.0 2.0 3.0 4.0

Age group

Categories Frequency Percentage Valid Cumulative

(years) Percentage
21 TO 30 TABLE 90
4. AGES OF45.0
45.0 45.0

31 TO 40 90 45.0 45.0 90.0

41 TO 50 10 5.0 5.0 95.0

51 TO 60 10 63
5.0 5.0 100.0

Total 200 100.0 100.0

SOURCE: From the data in Table 1.

From figure 4.3 above, it is shown that the age classes

limit are 20.5-30.5 years, 30.5-40.5 years, 40.5-50.5

years and 50.5-60.5 years with frequencies of 90, 90,

10, and 10 out of 200 respectively. This shows that this

is bi-modal distribution as the age classes of 20.5-30.5

years and 30. 5-40.5 years have a frequency of 10.

Figure 4.4 below shows the pie chart of the data on the

highest educational qualifications of the 200



15% OND



Educational Frequency Percentage Valid Cumulative
level Percentage Percentage
DIPLOMA 10 5.0 5.0 5.0

OND 30 15.0 15.0 20.0

HND 80 40.0 40.0 60.0

FIRST DEGREE 20 10.0 10.0 70.0

SECOND 40 20.0 20.0 90.0

NIM 20 10.0 10.0 100.0

Total 200 100.0 100.0

SOURCE: from the data in table 1.

From figure 4.4 above, the Educational Qualifications are

Diploma, O.N.D, First Degree, Second Degree and NIM

and the subtended angles in degrees are equal to 180,

540, 1440, 360, 720 and 360 and respectively at the center

of the circle.


Table bellow show the analysis of the statuses of the 200



Monetary policy rests on the relationship

between the rates of interest in an economy.
KNOW 2 12
OND 19 7
HND 26
60 31 31
DEGREE - 10 9 21
SECOND 31 9 200
Total 100 43 11

39 939

The above table shows that the total of 100 respondents

(out of 200 said YES. This proved that Monetary policy

rests on the relationship between the rates of interest in

an economy.

TABLE 7. Cross-tabulation 2

Monetary policy is one of the tools that a national/federal

Government DON’T
uses to influence its economy. NO

OND 19 19
HND 14 30 47 91
DEGREE 10 9 19
DEGREE 40 40
NIM 21 21
Total 104 40 47 9 200

The above table indicates that Monetary policy is one of

the tools that national/federal Government uses to

influence its economy. 104 respondents out of 200 said

yes. While 40 did not agree with the fact.


In attempting to arrive at decisions about the population,

on the basis of sample information, it is necessary to

make assumptions or guesses about the population

parameter involved. Such an assumption is called

statistical hypothesis, which may or may not be true. The

procedure, which enables the researcher to design on the

basis, is sample regards whether a hypothesis is true or

not is called test of hypothesis or test of significance.

The null hypothesis asserts that there is no significant

difference between the statistics and the population

parameters and what ever is observed difference is

there, is merely due to fluctuations in sampling from the

same population. Null hypothesis is thereby denoted by

the symbol H0. Any hypothesis, which contradicts the H0,

is called an alternate hypothesis and is denoted by the

symbol H1.

The researcher used chi-square analysis.


The c is one of the simplest and most widely used non-

parametric test in statistical work. It makes no

assumptions about the population being sampled. The

quantity c describes the magnitude of discrepancy

between theory and observation i.e. with the help of c

test we can know whether a given discrepancy between

theory and observation can be attributed to chance or

whether it results from the inadequacy of the theory to fit

the observed facts. If c is zero, it means that the

observed and expected frequencies completely coincide.

The greater the value of c the greater will be the

discrepancy between observed and expected


The formula for computing chi-square is –

c =∑ (O-E)2/E

Where,O=Observed frequency

E=Expected or theoretical frequency


For the data analysis and the interpretation, the

researcher has adopted advanced version of SPSS

(statistical package for social science). This application

software has facilitated the researcher to construct the

frequency table, various types of charts and to find out

the valid percentage responses from the sample. By this

automated data analysis it has minimized the

researcher’s time constraints and reduced human error

and give also accurate outlay of information.

Chi-Square Test (1)

Monetary policy rests on the relationship between

the rates of interest in an economy.
Observed Expected Residual Decision
YES 100 50.0 50.0 Accept
NO 43 50.0 -7.0 Reject
KNOW 39 50.0 -11.0 Reject
NO 50.0
ANSWER 18 -32.0 Reject
Total 200

Chi-Square Test (2)

Monetary policy is one of the tools that a

national/federal Government uses to influence its
Observed Expected Residual Decision
YES 104 50.0 54.0 Accept
NO 40 50.0 -10.0 Reject
KNOW 47 50.0 -3.0 Reject
ANSWER 9 50.0 -41.0 Reject
Total 200


The observed value of the dependent variable minus the

value predicated by the regression equation, for each

case. Large absolute values for the residuals indicate that

the observed values are very different from the predicted


SOURCE: From the questionnaires administered.

The formulated hypothesis that is subject to statistical

test is at 5% level of significance in testing hypothesis,

the calculated value of the test statistics is usually

compared with tables of value. The critical values of the

test statistics serve as criterion value. It afforded the

basis for rejecting the null hypothesis is a function of the

value of the tested statistic. Reject the null hypothesis if

the calculated value of the test statistic is greater than

the critical value. Accept the null hypothesis if the

calculated value of the test statistic is less than the

critical value.


Monetary policy is
Monetary policy rests on one of the tools
that a
the relationship between national/federal
the rates of interest in uses to influence
its economy.
an economy.
Chi-Square 73.880 94.120
df 3 3

note: df = degree of freedom


Level of significance……….0.05

Critical value………………………43.0

Calculated value……………………73.880

From the above analysis, it could be seen that in the first

test, Monetary policy rests on the relationship between

the rates of interest in an economy , the calculated

value is greater than the critical value so we reject the


In the second test which state that, Monetary policy is

one of the tools that a national/federal Government uses

to influence its economy. The level of significance is

0.05, the critical value is 44 while the calculated value

from the test statistics table is 94.120. Looking the data

above, it shows very clear that the calculated value is

greater than the critical value so we reject the





In this chapter, the researcher deals with the findings as regards

monetary policy and microeconomic instability in Nigeria. The work

is summarized with the conclusion drawn.


During the curse running the project, the researcher

discovered that 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 (iii) cost of money or rate of interest, in

order to attain a set of objectives oriented towards the

growth and stability of the economy.[1] Monetary theory

provides insight into how to craft optimal monetary


Monetary policy is referred to as either being an

expansionary policy, or a contractionary policy, where an

expansionary policy increases the total supply of money

in the economy, and a contractionary policy decreases

the total money supply. Expansionary policy is

traditionally used to combat unemployment in a

recession by lowering interest rates, while contractionary

policy involves raising interest rates in order to combat

inflation. Monetary policy is contrasted with fiscal policy,

which refers to government borrowing, spending and



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

both of these, to influence outcomes like economic

growth, inflation, exchange rates with other currencies

and unemployment. Where currency is 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 monetary authority has the ability to

alter the money supply and thus influence the interest

rate (in order to achieve policy goals).


Monetary policy is one of the tools that a federal Government

uses to influence its economy. Using its monetary authority to

control the supply and availability of money, a government

attempts to influence the overall level of economic activity in

line with its political objectives. Usually this goal is

"macroeconomic stability" - low unemployment, low inflation,

economic growth, and a balance of external payments.

Monetary policy is usually administered by a Government

appointed ”Bank", the Central Bank of Nigeria. The Central

Bank attempts to achieve economic stability by varying the

quantity of money in circulation, the cost and availability of

credit, and the composition of a country's national debt. The

Central Bank has three instruments available to it in order to

implement monetary policy:

1. Open market operations

2. Reserve requirements

3. The 'Discount Window'


1. "Monetary Policy". Federal Reserve Board. January 3,

2. B.M. Friedman "Monetary Policy," International
Encyclopedia of the Social & Behavioral Sciences, 2001,
pp. 9976-9984. Abstract.
3. Forder, James. ""Credibility" in Context: Do Central
Bankers and Economists Interpret the Term Differently?"
(December 2004). [1]

4. "Bank of England founded 1694". BBC. March 31, 2006.
5. "Federal Reserve Act". Federal Reserve Board. May 14,
6. Milton Friedman (1960), A Program for Monetary
Stability. Fordham University Press.
7. Ben Bernanke (2006), 'Monetary Aggregates and
Monetary Policy at the Federal Reserve: A Historical
8. Edward Nelson (2007), 'Milton Friedman and U.S.
Monetary History: 1961-2006', Federal Reserve Bank of
St. Louis Review 89 (3), page 171.
9. Blog: Favorite Friedman quotes
10. Wikiquote
11. "Exchange Rates". The Library of Economics and Liberty.
March 31, 2006.
12. Athanasios Orphanides (2008). "Taylor rules," The New
Palgrave Dictionary of Economics, 2nd Edition. v. 8, pp.
14. "Monetary Policy Framework". Bank Of England. 2006.
15. "U.S. Monetary Policy: An Introduction". Federal Bank of
San Francisco. 2004.