CHAPTER ONE INTRODUCTION 1.1 Background Information

Monetary policy is monetary management techniques put in place by the government through the central bank to control money stock that is supply of money in order to influence broad macro-economic objectives which include price stability, high level of employment, sustainable economic growth and balance of payment equilibrium. These broad objectives are achieved through the use of appropriate instruments, depending on which objective the policy formulated want to achieve on the level of development of the country.

Over the years, the major goals of monetary policy have often been the two later objectives namely: Inflation targeting and exchange rate policy. These objectives have dominated the Central Bank of Nigerian’s monetary policy focus based on the assumption that these are essential tools of achieving macroeconomic stability (Ajayi, 1999). The role of the Central Bank of Nigeria in controlling the monetary policy has facilitated the emergency of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and in value becoming a prominent earning asset for investors and source of balancing liquidity in the market. The two fundamental goals of monetary policy are to promote maximum sustainability output and employment and to maintain a sustainable price level in the economy, by so doing, the Central Bank has to checkmate the economy in the short run and in the long run, comparing the estimates to its goal for the output and price stability. If there be a gap between the estimates and the goals, the Central Bank of Nigeria has to embark on contractionary or expansionary measures to tackle the problems observed (Chimezie, 2012).