INTRODUCTION

Monetary policy is the process by which the monetary authority of a country controls the supply of money often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. It provides into how to craft optimal monetary policy which it is either expansionary or contrationary where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contrationary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy traditionally to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice business into expanding. Recent attempts at liberalizing ad reforming financial markets(particularly the recapitalization of banks and other financial institutions in Nigeria and

elsewhere) are gradually providing the latitude required to unemployment monetary policy framework by the relevant central banks.it uses three(3) main instruments: open-market operations, he discount rate and reserve requirements.

One of the major objectives of monetary policy in Nigeria is price stability. But despite the various monetary regimes that have been by CBN over the years, inflation still remains a major threat to Nigeria’s economic growth. The main thrust of this study is to evaluate the differences of monetary policy over unemployment reduction. This would go a long way in assessing the objectives of MP as a yardstick.

LITERATURE REVIEW

Specific studies examining the relative effectiveness of monetary are not many in Nigeria. For example, Ajayi (1974) maintained that much reliance have been placed on the use of fiscal policy rather than monetary policy. He then set out to investigate the usual hypothesis for the period between 1960-1970 in Nigeria. In his study, he estimated the variables monetary policy using ordinary least square technique. His result was in line with that of Anderson and Jordan (1968) revealed that monetary actions are much larger and more predictable than fiscal action while empirical result of Aigbokhan (1985) favored fiscal policy. He employed the elasticity version of the St. Louis equation and found that monetary policy exacts greater impact on economic growth in Nigeria.

Familoni (1989) argued that before monetary policy can produce desired result as maintained by the classical economist, highly integrated and

monetized economy and regular information network system are indispensable. He, however, lamented that the Nigeria economy lacks the fundamental, flexibilities (in respect to interest rate, treasury certificates) which could have aided a much more effective use of monetary policy. He therefore suggests the mixture of both fiscal and monetary policy for better performance in a developing country like Nigeria. Asogu (1998) adopted modified version of the St. Louis equation as in Batten and Hafer (1983) and provide estimates, based on first differences and percentages changes of the data. The results also include the respective t-ratios, beta and elasticity coefficients to facilitate direct comparisms.

The result of the estimate showed that coefficients of money supply were statistically significant while those of government expenditure were not significant. This agrees with the hypothesis that monetary actions are more potent than fiscal policy.

However, coefficient of export is not significant and this confirms earlier results by Ubogu (1985) such that the exclusion of export variable in the earlier studies on Nigeria appear not to weaken the conclusions of relatively greater and more stable potency of monetary actions indicate that they are more distortionary than achieving the desired impact or direction on the target variables.

Ajisafe and Folorunso (2002) report after using annual series data for the period of 1970-1998 that monetary rather than fiscal policy exerts a great impact on economic activity in Nigeria and that the emphasis on fiscal actin of the government has led to the study recommends that both policies should be complementary.

BODY

The Central Bank of Nigeria (CBN) uses monetary policy to achieve certain macroeconomic goals of price stability, low unemployment, reduce inflation among other objectives. These goals are attained by manipulating the money supply and influencing credit conditions in the economy. Because money as a means of exchange is the major lubricant of the nation's economic activities, the techniques of manipulation of monetary policy are often dictated by whether the apex bank wants to pursue an expansionary or contractionary policy. Recently, however, the application of monetary policy by the CBN has drawn the ire and criticisms of stakeholders in the private sector, with some describing the policy measures as emasculating. In a move to reduce the money in circulation, the CBN increased the Cash Reserve Ratio (CRR) from eight percent to 12 percent. The bank also maintained the Monetary Policy Rate (MPR) at the same high

level of 12 percent - a position the rate has remained at for the most part of this year. While the MPR is the rate at which the CBN lends to the banks, which in turn influences the interest rate, the CRR is used in regulating the percentage of liquid cash the banks must maintain with the CBN. In pursuing these money tightening measures, the CBN posits that the policy trajectory is aimed at maintaining price stability, strengthening the naira and reducing the structural excess liquidity in the banking system. As plausible as these goals may appear, analysts insist that the hikes in the MPR and CRR will create a squeeze and stifle investments in the economy. Maintaining the MPR at 12 percent will push interest rates higher. How many businesses, especially the Small and Medium Scale Enterprises (SMEs) can borrow at the prevailing lending rate of 25 percent and still make profit, while operating in an economy with decrepit infrastructures? Even those entrepreneurs who had strained to obtain bank loans under the present

high interest regime are saddled with even higher costs of productive inputs. The prohibitive prices of their finished products are out of the reach of most consumers. Consequently, the business is faced with low sales, low profit, reduced workforce and inability to meet the bank loan repayment obligations. The current CBN's initiative may also dissuade foreign investors and threaten their confidence in the nation's economy. It may be difficult to undertake attractive grandiose projects- which may require massive capital injection in an era of high interest rate. Furthermore, foreign companies who may be considering investing in Nigeria may look elsewhere because of the high cost of doing business in the country. With the unemployment rates at 25.6 percent in the rural areas and 17.1 percent in the urban centers respectively, applying monetary tools that constrict lending to businesses can reduce the total output in the economy. This may also exacerbate the unemployment condition in the country. Granted

that there is still a certain level of liquidity that the CBN maintains, even in the periods of credit constrictions, it is generally believed that such periods are often characterized by low productivity levels in the economy. As manufacturers and other stakeholders groan under the weight of the new policy measures, this paper undertakes to suggest how the CBN can use monetary policy to support the private sector: The CBN will have to reduce the benchmark interest lending rate to a low, single figure to encourage borrowing and investment by individuals and businesses in the private sector, especially for those in agriculture. Emerging economies, needless to say, have long recognized the critical roles of the private sector in providing employment, generating income and accelerating economic growth. Countries like Malaysia and India offer emulating examples of nations which have used private sector development strategies to grow their economies. Nigerian banks have always shown the reluctance to lend to the real sector, even when

interest rates were low. The CBN has to strictly enforce its credit lending guidelines to steer bank loans to support the private sector. Besides, banks have now taken advantage of the current increases in the yields of government bonds and Treasury Bills and the minimum risk they pose, to divert investments into these securities. The recent indications by the apex bank to penalize banks that indulge in lending irregularities are commendable, but this intended line of action must not amount to a mere brutum fulmen. In an economy such as Nigeria's with structural imbalances and parlous productive infrastructures, the use of monetary policy to achieve macroeconomic goals will meet with limited success. In this direction, fiscal policy must complement monetary policy. The 2013 budget of 4.92 Trillion naira proposes the sum of 1.540 Trillion naira for capital expenditure. It is regrettable that the twin problems of the national budget are the lower figures often allocated to capital projects and the non-adherence to the strict

implementation of the budget proposals. Be that as it may, the current budget must build on infrastructural development of power, (given the on-going reforms), roads and transportation to stimulate private sector productivity. A strong Nigerian economy driven by the private sector, will, all things being equal, engender competition, increase output and offer the benefits of economies of scale. In addition, there will be less dependence on imports and the national currency will strengthen. This will be a more effective way to fight inflation and unemployment in the country. Thus far, the present rates of the monetary measures of MPR and CRR are disincentives to the growth of the private sector. As the regulator of the banking sector, the CBN must strive to strike a balance between the goals of price stability and maintaining an attractive low interest rate to spur economic growth, in sync with the government Transformation Agenda. This is without a doubt, a thin line to tread. However, it is also important to

emphasize that the use of monetary policy have to take cognizance of the peculiar nature of the nation's economy. Growing the economy must remain a core policy of the apex bank, and supporting the private sector can provide the needed template in this direction.

CONCLUSION

This study examined the relative effectiveness of fiscal and monetary policy in an opened economy, Nigeria. The study made used of secondary data which were obtained from Statistical Bulletin published by Central Bank of Nigeria form 1970-2007. In the empirical analysis, we employed Johansen maximum likelihood cointegration procedure to show that there is a long-run relationship between economic growth, degree of openness, government expenditure and M2. The statistical insignificant of the coefficient degree of openness confirmed earlier results by Asogu (1998) and Ubogu (1985) as the exclusion of export variable in the earlier studies on Nigeria appear not to weaken the conclusions of relatively greater and more reliable, stable, strong and effective monetary actions compared with fiscal operations, rather sharp fluctuations of such fiscal actions indicate that they are more distortionary

than achieving the desired impact or direction on the target variables. The estimates used in this study revealed that the effect of monetary policy on economic growth in Nigeria is much stronger than that of fiscal policy. This study therefore, recommends monetary policy for the purpose of economic stabilization.

REFERENCE

http://www.medwelljournals.com/ fulltext/?doi=pjssci.2010.137.142

http://nigeriaworld.com/articles/2012/ nov/190.html

http://www.answers.com/topic/monetary- policy

http://en.m.wikipedia.org/wiki/ monetary_policy

http://www.google.com.ng/search?hl=en&q=meaning+of+monetary+policy&btnG=search.