Monetary policy is a measure designed to influence the availability, volume and direction of money and credits to achieve the desired economic objectives. In Nigeria, the authority to carryout monetary policy is vested in the central bank of Nigeria (CBN) through decrees 24 and 25 1991. (Godwin 2010).
The Central Bank of Nigeria (CBN) Act of 1958 mandates the Bank to promote and maintain monetary stability and a sound financial system in Nigeria. Like any other central bank, the CBN monetary policy stance pursues price stability and sustainable economic growth objectives. These encompass the attainment of full employment, stability in the long-term interest rates and pursuing optimal exchange rate targets. In pursuit of these objectives, the
An express supply of money which will result in an excess demand for goods and services will cause rising prices and or a deterioration of the balance of payments position. On the other hand, inadequate supply of money could induce stagnation in the economy thereby affecting growth and development. Consequently, the central bank as the central monetary authority, must attempt to keep the money supply growing at an appropriate rate to ensure sustainable economic growth and to maintain internal and external stability. The discretionary control of the money stock by the central monetary authority involves the expansion or construction of money influencing interest rates to make money cheaper or more expensive depending on the prevailing economic conditions and the channeling of money to priority
Foreign exchange Rate: The balance of payments can be in deficit or in surplus and each of these affect the monetary base, and hence the money supply in one direction or the other. By selling or buying foreign exchange, the Central Bank ensures that the exchange rate is at levels that do not affect domestic money supply in undesired direction, through the balance of payments and the real exchange rate. The real exchange rate when misaligned affects the current account balance because of its impact on external competitiveness. Moral suasion and prudential guidelines are direct supervision or qualitative instruments. The others are quantitative instruments because they have numerical benchmarks. Foreign exchange intervention is frequently being used by central banks in countries which have a floating exchange rate. Most theoretical monetary policy models, however, do not take this phenomenon into