

Monetary and Fiscal Policies: Tools for Economic Stability

Monetary and Fiscal Policies as Efficient Tools for Economic Stability with Specific to Central Bank of Nigeria (Awka-Branch)





This chapter, as the title implies, is the review of related literature, consideration of opinion, contribution of scholars, ideas, thesis, word and comments of others on this research topic and other process of research work related to it.

It is interesting to note here that reasonable number of authors and academicians and columnist have written a lot about this topic probably because the subject seem to form a very important element in the government and economic circle. Following the background of the fiscal and monetary polices in both the federal government and the banking system, it is obvious to note that it is an important instrument in a nations economy.

According to “Dr” J. Orji (2008 in his book titled, element of banking, defined monetary policy as deliberately effort by the monetary authority (CBN) to control supply of money and credit conditions for the purpose of achieving certain aboard economic objectives. And fisal policy as that of governing policy concerning the raising of revenue through taxation and other means and on level and pattern of expenditure for the purpose of influencing economic stability.

“Turgi B.I.” In his book titled public finance in (2005 defined monetary policy as the direct step which he government takes, in order to remove the conditions `of unemployment and depression in the economy by offering inducement to producers to increase investment. He also defined fiscal policy as the direct step taken to tackle the problems by employing more workers. Another write up by “Chukwudire” in his book titled public finance (1999) defined monetary policy as the measures designed to control the availability cost and use of money and credit in the economy for the purpose of achieving stated objective. And fiscal policy as the conscious attempt to direct the economic activity of government towards achieving economic growth and stability. “John Orji” in his book titled elements of Banking in (2004) defined monetary policy as a conscious action undertaken by the monetary authorities to change the volume, quality, availability, cost and direction of money and credit in a given economy. And fiscal policy is a deliberate government policy which is designed to change the level of government expenditure or diversity the level of taxation on both; for the purpose of achieving some designed economic objectives.

Finally, according to “Okpala C.M in his book titled banking in Nigeria issues and concept in (2010). Defined monetary policy as that measures designed by the monetary authorities, to control the economy for the purpose of achieving stated macro economic objectives.


Monetary policy is a major economics stabilization weapon which involves measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specific macro-economic policy objectives. These measures used include: open market operation (OMO), Moral Succession, reserve requirement etc.

Fiscal policy refers to that part of government policy concerning the raising of revenue through taxation and other means and deciding on the level and pattern of expenditure for the purpose of influencing economic activities.


From the various definitions of monetary and fiscal policy it can be seen that, they are slightly different from each other, though pursuer the same goal. Therefore Asuzu C.N (1995) in his book titled element of banking, differentiated between monetary and fiscal policies:

  1. Monetary policy is concerned with the control of the supply of money and credit conditions in the economy in order to achive certain objectives, while fiscal policy is a government policy concerned in the raising of revenue through taxation and other meems.

2        Monetary policy can be seen as the measures designed to control he availability, cost and use of money and credit in the economy for the purpose of achieving stated objectives while fiscal policy can be seen as the conscious attempt to direct the economic activities of government to wards achieving economic growth and stability.


Objective of monetary policy refer to the ultimate macro-economic fortunes of a particular country. According to Amechi O. (2010); Sanusi’s New banking model. Another industrial change Business Report, September … state such objectives as:

a        Maintenance of Relative stability in Domestic in Price;

This means avoiding under fluctuations of prices which are highly upsetting to the economy. This objective is concerned with the rising and falling of prices which are bad as they bring unnecessary losses to some and undue advantage to others. This objective involves avoiding share fluctuation in the domestic prices. It is also necessary in other to maintain international competitions.

b       Attainment of full employment: This is one of the most objectives of monetary policy. Full employment may be considered as a situation in which employment cannot be increased by the increase in effective demand, and unemployment does not exceed the minimum allowances that must be made for the effects of frictional and seasonal factors. It is now agreed that full employment stands for 96% to 97% employment. The 3% to 4% unemployment may be allowed for frictional factors.

c        Achievement of a high, rapid and sustenance of economic growth; This can be defined as the process whereby the real per capital income of a country increases over a long period of time. Economic growth is measured by the increase in the account of goods and services produced in an economy. In it’s wider perspective, economic growth implies raising the standard of living of the people and reducing inequality of income distribution. An good monetary policy should be designed to encourage even growth in the economy.

d       To achieve equality in Income Redistribution: This is done so as to achieve equity and the attainment of social and economic justice.

e        Maintenance of balance of Payment equilibrium: Another objectives of monetary policy is to mainteion equilibrium in the balance of payments. The achievement of this goal has been necessited by the phenomenal growth in the trade. Also a deficit in the balance of payments will retard the attainment of other objective because a deficit in the balance of payment leads to a sizeable outflow of foreign reserve.

f        Maintenance of stability in the external value of the currency: Maintaining the competitive position for the domestic currency in the international trade environment is an objective of the monetary authorities. This involves avoiding undue and unnecessary fluctuations in the currency exchange rate.

G       Reduction in the level of inflations: Inflation means a situation where the price of goods and service are continuously increasing. It reduce he purchasing power of individuals or makes money useless but with the help of such monetary policy measures employed y the central bank it may be checked.


Fiscal policy as an efficient instrument of policy may be used to accomplish the following goals according to Abdulahi M.M. (2010), U.S congress Appllaids CB.N Banking reforms pres statement As;

a        To increase employment opportunities or to attain full employment: Fiscal policy usually aims at reducing he unemployment rate in the economy. High rate of unemployment which is a problem to the economy requires expansionary fiscal policy but the government must always guard against the inflationary impact of expansionary fiscal policy achieving full employment does not means that all the people will be employed but means that all the people will be employed but means that there will be no significant involuntary unemployment.

b        Price Stability: Fiscal policy ensures stability in the domestic prices. It eliminates sharp fluctuations in the prices of goods and services. It aims at avoiding both inflation and deflation. During inflation, i.e Business expansions and very high economic activity, it is expected that contraction fiscal policy is adopted say by increasing tax to reduce the inflationary pressure and during deflation, the tax rate will be completely lowered so that the business and individuals will also increase it’s spending to help the economy pick up again.

c        To promote economic growth and development: Achievement of economic growth and development is one of the major objectives of fiscal policy. Economic growth refers to persistent rise in per capital income which is brought about by persistent increase in per capital production while economics development here refers to change in both economic growth and social structure and value usually accomplishing economic growth. Economic development explains increase in some basic infrastructural facilities. Socials amenities which influences the psychological and sociological state of the citizenry.

d       To achieve Equitable Distribution or redistribution of Income: Fiscal policy is an important measures used inachieving equity in income distrution. This rerales to reducing the gap between the rich and the poor and at the same time attain social and economic justice, inequality in income distribution which is always present in developing countries may be eliminated using progressive tax system. this tax structure collects more money from the rich and less money form the poor which is used in the interest of the general public.

e        To achieve a favourble balance of payment: Fiscal policy is usually used to solve the problem of balance in the balance of payment position of the economy. Persistent deficit in the country’s balance of payment is always avoided or corrected using fiscal policy. In such a situation, measures like import duties (an instrument of fiscal policy) may be increased to reduce importation. Equally import substitution industries should be established thereby encouraging exporting.

f       To increase rate of investment: Every economy aims at a high rate of investment since it is about high rate of employment and increase in income. This is one of the aims of fiscal policy. Fiscal policy is used to generate revenue which is used to increase investment especially in the key sectors of the economy thereby accelerating economic growth.

g        To achieve a stable exchange rate: Effective fiscal policy measures are usually employed by the government to avoid fundamental imbalance in he stations balance of payment position. Stability in the price has great influence on the value of a country’s currency which in turn affects the exchange rate between that currency and other major currencies of the world.


These instrument used by the monetary policy to control credit condition and to maintain stability are broadly grouped into two namely:

i         Quantitative Instrument: They are those used to control the growth of money supply. Quantitative instruments which have a quantitative impact on the aggregate bank reserve and credit therefore on the quantity of money in circulation and also have a quantitative impact on high powered money

ii        Quantitative Instrument: They are those instrument that all together influence quantitative development in he economy by ensuring that credit get to the desired sectors in the economy. They are used / designed to control the price of credit.

From these two groups, the tools for monetary policy are as follows:

a        Open market Operation (OMO): This is a quantitative instrument of monetary management. It refers to the buying and selling of government securities in the open market by the central bank. Government securities otherwise called gilt-edge securities includes government bonds, treasury bills treasury certificate etc. if the central bank wished to control the level of cash held by the commercial banks in other to ease or restrict, their ability to create credit and deposit and this can only be achieved through open market operations. The OMO is effective in controlling money supply when there is a well developed money and capital market.

b        Reserve requirement: It is divided into:

–        Cash reserve requirement: This is used by the central bank to control and regulate the cash resources of banking institutions.

–        Liquidity Ratio: This is desined to enhance the ability of banks ot meet cash with drawals on them by their customer or the ratio at whch total deposit liabilitie kin treasuring bills. It is usually expressed in percentage (%).

c        Discount rate / red is count rate / bank rate: This is a quantitative method which the central bank lend money to commercial bank, discount houses, and other financial institutions (rediscount rate). This rate represents the cost of borrowing to the commercial banks.

When the monetary authorities pursue a concretionary policy, ie to decrease the volume of credit it increases this rate. Such increase may discourage the banks from borrowing and even where they borrow, they still transfer the cost to their loan customers.

d       Special deposit of stabilization securities: This is a modern method of quantitative monetary control which strikes directly at the banks liquidity and consequences on the money supply. It is designed to supplement other measures. This represents a specified percentage of commercial banks deposit in cash or government securities (stabilization securities) which the central bank require them to hold, over and above the legal minimum cash reserves.

e        Variables liquid assets Ratio: This is another quantitative monetary policy instrument which compels the banks to spread / diversity their port folio of liquid asset holding. It suggest the percentage of funds that must be put in various assets (loans, other investment, fixed assets etc)

f        Moral Suasion and Directives: This is a qualitative monetary policy instrument. It involve output appeals public pronouncement, and persuasion to the banks. This is a method by which he central bank persuades the commercial banks to behave in the interest of the general public.

g        Selective Credit Control (Directives): This is a quantitative monetary policy which dictates which sector of the economy gets: what percentage of the bank credit depending on the need of the economy. The central bank uses it in giving directives to banks on priorities to be observed.


This is broadly group into two namely:

  • Discretionary fiscal stabilizers
  • Automatic fiscal stabilizers.

*        Discretionary fiscal stabilizers: This can also be called active fiscal stabilizers, it is an action designed as a direct response to a presently identifiable macro-economic problem. Such discretionary measures include deliberate changes in tax bases, tax rates and government expenses to stimulate or rest rain economic activities.

*        Automatic Fiscal Stabilizers: Also called “built-in-stabilizers are established policies of government which base he characteristics of automatically adjusting their sales to change in some means variable and this produce a stability influences don the economy without any deliberate action of government, for example, in boom times, progressive income tax automatically reduces money supply as income and spending rise, similarly, in recessionary time. Payment of unemployment benefits injects ore in the system and stimulates demand. Therefore a lending for the economy to more recession is automatically continued by a reduction in tax payment.


The genesis of monetary and fiscal policies in Nigeria dated back to the establishment of the central bank of Nigeria (C.B.N) in 1959.

The central bank bask ride the financial system in Nigeria at the tax as the sole agent of government monetary and fiscal policies. Monetary policies to be administered by the central bank in some cases with some degree of political or government interference.

In Nigeria, before 1986, the central bank formed the monetary policy, where disagreement arose as to either what the contents of the policy were to be or the models operandi of pushing it through. References was made to the federal executive council which was the final orbiter.

Hence, monetary and fiscal policies have been the major economic weapon which involves measures designed, to regulate and control the volume, cost, availability and directions of money and credit in an economy. Further more, as the economic activities of government include government expenditure, taxation, borrowing, lending, buying and selling the government also find the need to control these activities. This fiscal policy was formed in Nigeria. Indeed economists agree that growth without stability is as undesirable as stability without growth.

The true goals or this monetary and fiscal policy is to promote economic growth and economic stability – “Chukwudire U. in his book titled public finance a didactic approach (2nd edition). Therefore, there has been immense effort made in order to maintain a stable economy in the country and that was the formulation of making fiscal policies. Since their introduction, there has been sound development in the Nigerian economy.


Since the introduction of these fiscal and monetary policies. There has been a relative stability in the domestic price, as they always fight inflation or deflation in the economy. Also the balances of payment rates has also been stable. They have been instruments used to fight unemployment in the economy. Even the financial resources can be made available for economic development through the various loans granted in the monetary policy. fiscal policy also contributes to the development of the nation through the fiscal measures which are beneficial to the agriculturalist and industrialist like tax incentive.

These monetary and fiscal policies highly encouraged and contributed in the stability of the economy.







The attained goals for monetary and fiscal policies in Nigeria economy, generally summarized to mountain the following:

1        Economic Growth

2        Economic stability

Economic Growth: This is a positive movement of the economy which he economy make, in order to maintain a high standard of living for its people or a persistent rise in per capital income which is brought about by persistent increase in per capital productivity. While economic development here refers to the change in both economic growth and social structure and value, usually accompanying economic growth. Economic growth explains increase in some basic infrastructural facilities, social amenities which influences the psychological and sociological state of the citizenry.

  • Economic stability: This simply means price stability and full employment. It does not eliminate the flexibility of individual market price which is necessary to adjust production to consumption. According to Okpala C.N in his book titled “banking in Nigeria – issues” he emphasizes that economic stability ensures stability in he domestic price, it eliminates sharp fluctuations in he prices of goods and services. It aims at avoiding both inflation and deflation.

In fact, the policy has succeeded in achieving price level stability of relative price which are now compatible which greatly encourages price stability.

Problems of Implementation of monetary and Fixed Policy:

There are two (2) major problem which exists in the implementation of monetary policy namely:

*        Necessary Conflict: This exists when the attainment of objectives precluded the attainment of the other. That is the objectives are inherently incompatible. For instance, full employment may conflict with rapid economic growth which is dependent on the acceptance of innovation and changes it maintenance of full employment encourages reliance on the static goal.

*        Policies Conflict: This arises when policies has difficulties in pursuing both goals simultaneously. For instance, and easy monetary policy designed to stimulate interest and may generate higher inflation if the growth is not enough to inhibit it.

*        Other problem include: In a situating where the economy is experiencing inflation and slow economic growth, a tight monetary policy (to fight inflation) will reduce investment and growth ever further degree of comprehensive designed and package policy orders.

Fiscal Policy: There are broad problem with the effectiveness of fiscal policy is limited by the time lay involved. Time lay means the time when the need or a new policy arise, the need is realized.

*        Fundamental Limitation: These are those fundamental problems which call for basic adjustment of wages to the productivity in various times of wages to the productivity in various times of economic activities.

*        Other problems are political objectives in the way of successful fiscal arising because the economy is shaped to allow full expression of dissent which may be authentically of executive parliamentary decision about debatable issue.


The experience of Nigeria revels that monetary policy plays limited role in the country. The following arguments are given in support of the view:

1        There exists large informal financial sector which hinders the success of monetary policy in Nigeria. Majority of the people like in rural areas where the use of formal financial institutions is limited.

2        The money and capital market are under-developed. These markets lack in bills, stocks, shares and other securities and as such limits the successful implementation of the monetary policy.

3        large number of Non-bank financial institutions operate in the country, but hey are not under the strict control of the central bank of Nigeria, their operations lend to weaken the efficiency of the monetary policy.

4        Many banks in Nigeria, posses high liquidity so that they are not influenced by the credit control policy of the central bank of Nigeria.

5        Foreign participation in the banking makes the monetary policy less effective. This is because the foreign participation in the industry can draw funds from their offices abroad when central bank of Nigeria is following a contraction monetary policy.

6        There are some effluent people in the economy who have very low banking habit. Hey make it very difficult for the cental bank of Nigeria to control such money kthat does not go through the banking system. l

7        In addition, the reward on government securities used for open market operations is relatively lower than what othr private sector investment earn the low return on government securities discourages people from participating actively in the purchase of government securities in the open market operations.



When aggregate demand for goods and services, the level of employment and prices are generally low, the economy is said to be faced with recession. In order to get the economy out of recession, the government can apply fiscal policy to solve the problem. it may achieve it’s objective by taking the following measures:

*        Reduction in taxation: By reducing recession, peoples income and profits of corporate bodies more money will be made available for spending and aggregate demand will increase

*        Grant to Industries: This would serve as incentive to boost production.


According to Tejvan petinger (2012) an economist in his work, “Helping to simplify economics”, Monetary policy involves influencing the supply and demand for money through interest rate and other monetary tools. He said that the target of monetary policy is to achieve low inflation and to promote economic growth. He said that fiscal policy relates to the impact of government spending and tax on aggregate demand and the economy.

“Dr” F. Steb Hipple (2013) in his book fiscal policy Vs monetary policy, defined fiscal policy as the use of government expenditure and revenue collection to influence the economy while monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy

Wikipedia (2015), defined fiscal policy as the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. And monetary policy as the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general truth kin the currency.

Instructor Shawn Cirimsley (2003) in his transcript titled “How fiscal and monetary policy affect the economy”. Defined fiscal policy as a government decision regarding spending and taxing. And monetary policy as he decision a government makes regarding the money supply and interest rates.


3        Monetary policy uses interest rate set by the central bank while fiscal policy involves changing government spending and taxes to influence the level of aggregate demand.


The instrument of fiscal policy can also be viewed by some other writers or economist or instance “Chad Brooks who said hey include. “Taxes and spending”. Onyemanam Chibuzo (2013) government as “government expenditure and taxation. We will go further to know what they mean.

*        Taxes: They are the most important sources of government revenue. According to OJO (1982) Tax is a compulsory levy imposed by the government on individuals and business firms and paid by them to government.

*        Governemtn expenditure: This can bae in the form of recurrent or capital expenditure. Recurrent expenditure refers to the usuall continuous cost of running the government machinery while capital expenditure refers to fund expenditure allocated to viable and relevant projects.

*        spending: This is used as a tool for fiscal policy to drive government money to certain sectors that need an economic boost.


1        Formal financial institutions should be made available in the rural areas and the ones in the urban areas be reduced

2        The development of the money and capital market should be put into consideration.

3        Non-bank financial institutions in Nigeria should be subjected under the control of the central bank.

4        The level of liquidity of Nigeria bank should always be checked and not to be allowed to exceed the maximum liquidity requirement.

5        Finally, this work weeks to encourage price stability and generate trust in the Nigerian currency, by the use of the monetary policy.

More Accounting Project Topics and Materials





ACCOUNT NUMBER: 4831029253




ACCOUNT NUMBER: 3092548117


  1. Your Depositors Name
  2. Teller Number
  3. Amount Paid
  4. Project Topic
  5. Your Email Address



This entry was posted in Department of Accounting / Accountancy and tagged , , , . Bookmark the permalink. Post a comment or leave a trackback: Trackback URL.

Post a Comment

