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AN
EVALUATION OF OPEN MARKET OPERATION AS AN INSTRUMENT OF MONETARY POLICY IN
NIGERIA
CHAPTER ONE
1.0 INTRODUCTION
Monetary
Policy refers to the mechanism for regulating the value, supper and cost of
money at optimum levels that will ensure the attainment of desired national
economic objective which include price stability, sustainable output and
employment growth and external viability it encompasses actions designed to
manage the growth of money supply during a period of his optional target. The
monetary policy strategy for the achievement of these goals in any economy is
often influenced by the stage of development of the economy and its financial
infrastructure. when the monetary policy strategy is successful, the level of
money becomes compatible with the rate of growth of output inflation and
interest rate. Money at this level plays the role of an efficient lubricant of
the wheel of economic activities in such a way that it will not constitute a
nuisance to the extent that its supply will be too much or first- rate business
intentions to that extent that its supply will not be enough .
There are
two main monetary policy strategies, which are direct and indirect approach.
The direct
approach to monetary could comprise the use of instruments such as credit
ceilings. Selective credit control, administered interest and exchanges rate as
well as the prescription of cash reserves requirement and special deposits. In
the early stages or economy development, central Bank typically rely on direct
instrument of monetary policy, notably administrators controls of bank credit
and interest rates.
However, the
prolong use of there direct control In the Nigeria economy generated
considerable problems and because counter productive. The use of direct
administrative controls of interest rate, credit ceiling and sectoralallocation
have been found, the world over to
inhibit efficiency in resources allocation as will as innovative ideas and
development in individual institution.
Due to all
these negative effect manifested by the direct approach, there was urgent new
to more rewards the institutionalization of market basedinstrument of control
alsoknown as the indirect approach. This was accompanied by deregulation of
interest rate and de-emphasizing of the use of credit allocation and control
policies followed by the introduction of indirect tools of monetary policy
enchased on open market operator (OMO),.
The open
market operations involves the discretionary power of the CBN to purchase or
sell securities in the financial market in order to influence the volume of
liquidity and levels of indirect taxes, which alternately will affect the money
supply and inflationary pressure in the economy. It was introduced in June,
1993 and has continued to be the main instrument of monetary policy in Nigeria.
Omo allows
for Flexibility in policy implementation because it permits small and frequent
charges in instrument, which enables the authorities respond rapidly to shock
as the need arises. Open market operations are preferred by the CBN for the
money supply for several reasons .
First, Omo can
be used with some precision. If the CBN wants to change the money supply by
just a small amount, it can buy or sell - longer change in the money supply, it
can buy or sell a long amount.
Secondly,
open market operations are extremely flexible. If CBN decides to reverse
course, it can easily switch from buying securities to selling securities.
Finally Omo have a family predictable effect on the supply of money. Since
banks are obliged tomeet their reserves requirement, an open market sell
of N 10m in government securities will
deduce reserves by N10m, which will reduce the supply of money by N10m times
the money multiplies.
1.1
STATEMENT OF THE PROBLEM
The open
market operation is an important weapon of monetary control in Nigeria. There
have been various write ups concerning me performance of the open market
operation and its effectiveness on the monetary policy, this is because open
market operation is how in vogue in both developed countries e.g Nigeria.
The question
that baffles one so much the Nigeria economy is the rising inflation rate why
has inflation in Nigeria economy remain on the increase despite the different
monetary policy instrument of the government? What are the major causes of the
instability of domestic prices and also the excessive reserves usually
maintained by Banks?
In this
study, efforts will be made to answer these question listed above, This study
will also analysed theefficacy of money supply and the overall performance of open market operation
as a policy tool of indirect monetary control.
1.2
OBJECTIVES OF THE STUDY
The main
objective of this study is to appraise this vital instrument of monetary policy
with emphasize an highlighting us
problemsand prospects.
Through this
study, the performance of open market operations in regulating money supply in
theeconomy will be cortically analysed.
It will also
suggest ways and means through which money supply can be effectively
controlled. It will also help-in proffering solutions an how to improve the
effectiveness of open market operation in Nigeria.
1.3
HYPOTHESIS TESTING
It’s an
attempt to empirically answer the research question that the following research
hypothesis will be tested in order to verify the relationship between money
supply and the open market operation in Nigeria.
Ho = that
there is no significant relationship between money supply and open market
operations.
Hi = that
there is significant relationship between money supply and open market operations.
1.4
SIGNIFICANCE OF THE STUDY
This study
is very significant in that, it is very important and effective tool in
combating inflation and excess money supply if properly used.
It will also
help in mopping - up excess liquidity In the
banking system. It will make the monetary authority have insight on how
to respond to frequent monetary shock in the economy.
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