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There have been efforts by the Central Bank of Nigeria to influence output using monetary policy. In 1987, the MRR was reduced from15% to 12.75%, subsequently the lending rate increased, credit to private sector also increased. The contribution of manufacturing sector to GDP declined, while those of agriculture and services increased. Again in 2006, the MPR was set at 10% from MRR of 14%, subsequently the lending rate decreased, credit to private sector increased. The contribution of manufacturing sector to GDP further declined, while those of agriculture and services increased further. This study therefore examines the impact of monetary policy on selected sectoral output in Nigeria 1986-2012. The selected sectors are; agriculture, manufacturing and services because of their role in provision of food, employment, reduction in poverty and attainment of higher standard of living for the populace. The study employs the Cointegration test and VAR methodology. Cointegration test reveals that there is long run relationship between monetary policy variables, agricultural sector and manufacturing sector output and no long run relationship between monetary policy variables and services sector output. The result from impulse response function shows that monetary policy rate does not impact all the three sectoral outputs. This finding is not in conformity with apriori expectation. The lending rate was found to impact all the three sectors. Also the variance decomposition shows that inflation was the most important variable that explains variation in the agricultural sector output, followed by M1 and lending rate. In the manufacturing sector, M2 was the most important variable that explains variation in its output, followed by lending rate and M1. The most important variable that explains variation in services sector output was M1, followed by M2, credit to private sector and lending rate. The CBN should encourage Commercial banks and other credit institutions to improve upon their loan procedures so that farmers, manufacturers and services providers can have access to their credit facilities. Efforts should also be made to ensure that the credit is used for productive purposes.



Monetary policy as a technique of economic management for sustainable economic growth and development has been the pursuit of nations. Formal articulation of how monetary policy affects economic aggregates dates back to the time of Adam Smith and later championed by monetary economists (Fishers, Friedman, Tobin and others). Debate on the impact of monetary policy on the real output started since the exposition of the role of monetary policy in influencing macroeconomic objectives like economic growth, price stability, equilibrium in balance of payments and a host of other objectives. However, recently there seems to be increasing consensus among monetary economists and policy makers that monetary policy has real effects at least in the short run. Consequently, focus of monetary policy has shifted from the big question of whether money matters, to emphasizing other aspects of monetary policy and its relations to real economic activities. One aspect that has received considerable attention of recent is the sectoral effects of monetary policy shocks. Recent studies on the subject (Ibrahim 2005, Hayo and Uhlenbrock 1999, Ganley and Salmon 1997 and others) make it quite clear that different sectors of an economy respond differently to monetary shocks. This observation has profound implications for the macroeconomic management as the central bank will have to weigh the varying consequences on the different sectors of the economy. A comparison of the impact of monetary policy across different sectors may therefore provide valuable information for the monetary authorities on how monetary policy shocks are propagated through the economy (Alam and Waheed 2006).

Monetary policy action of the central bank begins when the authorities adjust the short term interest rate to increase or decrease the availability of credit in the economy. Monetary policy is therefore executed through increasing or decreasing the monetary policy rate (MPR). These actions are then passed through to the real economy such that a change in the planned monetary policy rate affects other interest rates within the economy. It is through this effect that spending behaviours of both consumers and businesses are altered. Central Bank‟s altering of the monetary policy rate is based on the assumption that “ceteris paribus” these changes will in turn impact on other short term interest rates within the financial


system. Therefore, a change in short term monetary policy rate is the first step in monetary policy transmission. This change is expected to affect consumption as well as investment spending of the economy through other retail rates determined by banking and non-banking institutions. For monetary policy to be potent, it must impact on consumption, investment, GDP and other economic variables (Lamin 2011).

Monetary policy is being executed by the Central Bank of Nigeria in order to promote economic growth of the nation through the attainment of its objectives such as price stability, favourable terms of trade, output growth and others. The attainment of the aforementioned objectives could help provide employment for the citizenry, eradicate poverty and ensure higher standard of living. The objective of output growth in particular, can be achieved through the contribution of the various sectors of the economy so as to avoid monoculturally dependent economy. These key sectors otherwise known as real sector play fundamentally important roles in the economy of any nation. Most economies of the world developed through effective investments in real sector. The attempt to strengthen the sectors of the economy by the government led to the implementation of financial liberalization policy in 1986 as part of the structural Adjustment Programme. The SAP was an economic reform program aimed at restructuring the economy and averting economic collapse. The key objective of Structural Adjustment Programme was to lay the basis for sustaining non-inflationary or minimal inflationary growth and improve the efficiency of the sectors. Therefore the financial liberalization policy entails the provision of an appropriate legal and regulatory framework for effective private participation in the economy. This was thought to be achieved through a well-developed and efficient financial sector that can speedily and cheaply mobilize needed funds for productive investments in the economy. However, as an instrument of monetary policy the central Bank of Nigeria CBN indirectly influences the level and direction of change in interest rate movement through its invention rate on various money market assets especially the Minimum Rediscount Rate (MRR). The MRR as the nominal anchor of CBN‟s interest rate policy continued to be used proactively in line with prevailing economic conditions (Mike 2011). .

Further, the MRR has undergone some fluctuations since 1987 to date as a result of the changes in the CBN policies which in turn have changed the overall economic conditions. In August 1987, MRR of 15.0% was reduced to 12.75% in December of 1987 with the objective 2

of stimulating investment and growth in the economy. However, in October 1996, interest rates were fully deregulated with the banks given freedom to determine the structure of interest rates in consultation with their customers. The CBN however, retain its discretionary power to intervene in the money market to ensure orderly developments in interest rates. Interestingly, the MRR was replaced with the Monetary Policy Rate (MPR). Again, the MPR was brought down to 10% from 14% MRR, with a lending rate of 13% and a deposit rate of 7% which stood as a standing facility intended to stem volatility in interest rates especially that of the interbank rates (Imoughele 2014).

It is observed that the financial sector credit concentrate more on the oil and gas sector,

communication and general commerce to the disadvantage of the core real sectors such as agriculture, manufacturing and services sectors of the economy which are crucial in terms of provision of employment, poverty reduction, maintenance of balance of payment equilibrium and higher growth of the overall economy. A closer look at the credit flow to these sectors shows that in 2003, agriculture got 5.16%, manufacturing 24.46% and services sector 24.40%. These declined to 1.96%, 17.66% and 19.82% respectively in 2006. Again, in 2009 the credit flow to these sectors further declined to 1.12%, 12.30% and 11.80% respectively (Elijah 2012).

1.2 Problem statement

The main instrument of monetary policy used by the Central Bank of Nigeria in the execution of monetary policy is the monetary policy rate (MPR). This rate has been used by the CBN as the nominal anchor to influence the cost of funds in the economy. Decrease in MPR results to increased spending, investment, output and employment while an increase in MPR results in decreased spending, investment, output and employment.

Since after the deregulation of interest rate in Nigeria in 1986, it was the minimum

rediscount rate (MRR) that showed the policy stance (direction) of the monetary authorities. In 1987, the MRR was reduced from15% to 12.75%, subsequently the lending rate increased, credit to private sector also increased. The contribution of manufacturing sector to GDP declined, while those of agriculture and services increased.



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