ABSTRACT
This research work was
carried out to find out the effectiveness of fiscal policy and economic growth
in Nigeria and to determine through co-integration and error correction
modeling techniques. The data source was mainly CBN statistical Bulletin, and
by means questionnaire and personal interview, the result of our analysis shows
that monetary rather than fiscal policy exerts a great impact on economic
activity in Nigeria. The emphasis on fiscal action of the government has led to
greater distortion in the Nigerian economy; we are, however, of the opinion
that both monetary and fiscal policies should be complementary.
TABLE OF
CONTENT
PAGE
Title Page .
Certification ii
Dedication iii
Acknowledgement iv
Abstract V.
Table of content vi
CHAPTER ONE - Introduction
1.1 Background of the
Study 1
1.2 Statement of Problem 4
1.3 Objectives of the Study
6
1.4 Significance of the
Study 6
1.5 Scopeofthe Study 7
1.6 Justification of the
Study 7
1.7 Limitation of the
Study 8
1.8 Definition of Terms 9
CHAPTER TWO - Literature
Review
2.1 Introduction 11
2.2 Theoretical Framework
41
CHAPTER THREE - Research
Design and Methodology
3.1 Research Design 45
3.2 Population of the
Study 45
3.3 Sampling Procedure 45
3.4 Data Collection Method
47
3.5 Method of Data
Analysis . 47
3.6 Sources of Data
Collection . 48
CHAPTER FOUR: Presentation
and Analysis of Data
4.1 Introduction 50
4.2 Test of Hypothesis 53
4.3 Hypothesis 55
4.4 Discussion of Finding
57
CHAPTER FIVE: Summary of
Findings, Conclusion and
Recommendations
5.1 Introduction 60
5.2 Summary of Findings 61
5.3 Conclusion 62
5.4 Recommendations 63
References
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF
THE STUDY
The relative effectiveness of fiscal and monetary
policies has been subjected of controversy among economist. The monetarist
regards monetary policy more effective than fiscal policy for, economic
stabilization.
Economy whether developed or developing is out to achieve
certain objectives which include full employment, equitable distribution of
income, desired rate of growth and price stability. In attempt to achieve these
objectives, government usually adopt two major mechanisms namely fiscal and
monetary policies.
Fiscal policy should not be seen in isolation from
monetary policy, for most of the last thirty years, the operation of fiscal and
monetary policy was in the hand of just one person — the Chancellor of the
Exchequer. However the degree of coordination the two policies often left a lot
to be desired, even though the BOE has operational independence that allows it
to set interest rates, the decision of the monetary policy committee are taken
in full knowledge of the Government’s fiscal policy stance.
The impact on the composition of output, monetary policy
is seen as something of a blunt policy instrument — affecting all sectors of
the economy although in different ways and with a variable impact. Fiscal
policy changes can be targeted to effect certain groups (e.g increase in means
— tested benefits for low income households, reductions in the rate of
corporation tax for small — medium sized enterprises, investment allowances for
business in certain regions, consider too the effects of using either monetary
or fiscal policy to achieve a given increase in national income because. actual
GDP lies below potential GDP (i.e there is a negative output gap).
Monetary policy expansion, lower interest rate will lead
to an increase in both consumer and fixed capital spending both of which
increase current equilibrium national income. Since investment spending results
in a large capital stock, then income in the future will also be higher through
the impact of LRAS.
Fiscal policy expansion, an expansion in fiscal policy
(i.e an increase in government spending) adds directly to AD but if financed by
higher government borrowing, this may result in higher interest rates and lower
investment. The net result (by adjusting the increase in G) is the same
increase in current income. However, since investment spending is lower, the
capital stock is lower than it would have been, so that future incomes are
lower.
Therefore, fiscal policy is manifested in a government’s
policies on taxation and expenditures. To obtain funds for their operation,
government units generally collect some form of taxes, the expenditure of these
funds not only provides goods and services for constituents, but has a direct impact
on the economy, for example, if expenditures are larger than the funds received
by the government, the resulting deficit tends to stimulate the economy, as
goods and service are produced for government purchase. In contrast, if a
government runs a surplus by not spending all the funds it collects, economic
growth will generally be curtailed as the surplus funds are removed from
circulation in the economy.
Fiscal policy may be described as the policy pursued by
government to change expenditures and taxes to influence the level of key
economic aggregates like GNP, employment, the general price level and the
balance of payments. In a broader sense, fiscal policy may also be taken as
including the use of tariff measures to influence the level of this macro —
economic variation (although strictly speaking tariff come under commercial
policy). M. A. lyoha (2004) money policy refers to the attempt to achieve the
national economic goals of full employment without inflation, rapid economic
growth and balance-of-payments equilibrium through the control of the economy’s
supply (through the high of powered resources) and the rate of interest.
The instrument of discretionary monetary policy includes
the following: Open Market Operation (OMO), discount rate mechanism,
manipulation of reserve requirements, moral suasion, direct control of banking
system credit, and direct regulation of interest rates. Both fiscal policies
along with monetary policy is to regulate the level of economic activity, the
price level, and the balance of payments. Fiscal policy also determined the
distribution of resources between the public sector and the private sector and
influences the distribution of wealth.
1.2 STATEMENT OF
THE PROBLEM
There is consensus of opinion in literature on the relation
effectiveness of fiscal and monetary policies on economic growth in developed
and developing countries of the world. However, there has been contrasting
opinions on which the two policies exert greater influence or determines the
natures and tempo of aggregate economy activities in any economy. The relative
superiority has been a subject of controversy among economists. Friedman (19S9)
claim that, there has been striking division among students of economic affairs
about the rate of money in determining the causes of economic events.
Fiscal policy basically follows the economic theory of
the 20th century English economist John Maynard Keynes said that insufficient
demand causes unemployment and excessive demand leads to inflation. It aims to
stimulate demand and output in periods of business decline by increasing
government purchase and cutting taxes, thereby releasing more disposable income
into the spending stream and to correct over expansion by reversing the
process.
Working to balance these deliberate fiscal measures are
the so- called built-in stabilizers, such as the progressive income tax and
unemployment benefits, which automatically respond counter cyclically. Fiscal
policy is administered independently of “Monetary Policy” by which the Federal
Reserve Board attempts to regulate economic activity by controlling the money
supply. The goals of fiscal and monetary policy are the same, but Keynesians
and Monetarists disagree as to which of the two approaches work best. At the
basis of their differences are question dealing with the velocity (turnover) of
money and the effect of changes in the money supply on the equilibrium rate of
interest (the rate at which money demand equals money supply).
1.3 OBJECTIVE OF
THE STUDY
The main objectives of this
study are:
(i) To examine the
relative effectiveness of monetary policies in Nigeria.
(ii) To examine the
relative effectiveness of fiscal policies in Nigeria
(iii) To determine the
appropriate policy that will impact positive1y on the economy growth of the
country.
(iv) To establish
credibility with the exchange rate
1.4 SIGNIFICANCE OF
THE STUDY
Here we need to emphasize the mutual dependence of fiscal
and monetary policies. Bello (2003) enlighten us on the relative importance of
monetary and fiscal policies in the economy that fiscal policy measures by
government to stabilize the economy, specially by adjusting the level and
allocations of taxes and government expenditures. While monetary policy
referred to as either being an expansionary policy or a contractionary policy,
where an expansionary policy increase the total supply of monetary in the economy,
and a contractionary policy decreases the total money supply.
1.5 SCOPE OF THE
STUDY
The purpose of this study, in determining the
effectiveness of fiscal policy and monetary policy indicators will be narrowed
to the trends in the economic growth, the regulation of economic activities,
the price level, and the balance of payments. Because, fiscal and monetary
policy have macroeconomic implication virtually in all aspects of the economy,
this research work is limited from 180 — 2006.
1.6 JUSTIFICATION
OF THE STUDY
Fundamentally, fiscal policy should not be seen as
isolation from monetary policy, first if not the goal they are set to achieve,
we should look at the credibility with the exchange rate, for example when the
economy is in a recession monetary policy may be ineffective in increasing
current national spending and income. The problems experienced by the Japanese
in trying to stimulate their economy through a zero — interest rate policy
might be mentioned here. In this case, fiscal policy might be more effective in
stimulating demand, Nelson F. (2007).
1.7 LIMITATION OF
THE STUDY
The possible problems, which may be encountered in the
courses of carrying out this research, are as follows:
(i) Timing Problem: At any time it is impossible to reliably
forecast about economic conditions a few months or years ahead, consequently it
is impossible to time fiscal policy for maximum effectiveness.
(ii) Time lags in the
policy process that is measurement, decision, execution and then effectiveness
of policy changes.
(iii) Fiscal policy is
weak (ineffective) when investment is very sensitive to interest rates and when
consumers pierce the veil and attempt to offset the actions of the government
(e.g saving a tax cut, or increasing their saving when higher government
spending leads to expectations of higher taxes in the future).
(iv) Monetary policy is
weak (ineffective) when consumer are willing to hold large quantities of money
rather than spend them even when interest rates are very low.
1.8 DEFINITION OF
TERMS
BALANCE OF PAYMENT: The balance of payment of a country
may be defined as the summary record of all the international, economic and
financial transactions of that country during ‘a specified period of time, the
time period is usually one year.
BALANCE OF TRADE: These are payment and receipts
arising put of total goods sold and bought by a country in international trade,
when visible export equal visible import in money terms, we have a balance
trade.
PRICE STABILITY: This is an upward and downward movement of price
because of the shortage or excess in the supply of raw materials. FULL
EMPLOYMENT: This is the provision of amenities for the establishment of
industry in a country so that the surplus job seeker can be employed.
OPEN MARKET OPERATION: This involves the sale or purchase
of government (or other eligible) securities in the money market with a view to
regulate the cost and availability of credit.
DISCOUNT RATE: The Central Bank is the lender of last resort to the
commercial bank is known as “rediscounting” (because the loan is normally
secure by commercial paper already discounted by the commercial bank).
MORAL SUASION: This refers to occasions when the Central Bank resort
to exhortation and admonition in an attempt to create the expectations and the
financial climate it deems desirable and influence the lending operations of
the commercial banking system.
DIRECT REGULATION OF INTEREST RATE: This tool is generally
used in LDCs and not in MDCs. Interest rates are market — determined to a large
extent. However, in LDCs like Nigeria, interest rates were for many years
administered.
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