The Limitations of Monetary Tools in a Developing Economy like Nigeria

Abstract

In the classical system, the classical and neo-classical economists under the assumption of perfect competition, wages and prices flexibility, belief that the economy of was self adjusting and equilibrium income always tend towards its full employment level when disturbed especially in the long-run. These concepts were accepted and formed the corpus of economic  knowledge from which polices were drawn. Governments were not to intervene in the event of any dislocation arising say from inadequate  demand. The events of the Great Depression of 1929-1932 shook the very foundation of World Economics so that the classical schools prescription of no government action was no longer a solution. The need for a change in concept was therefore obvious. Economists like John Maynard Keynes  succeeded in making a transition from old to new. In his demand  management ideas, he identified the issue of the deflationary gap which is inconsistent with the classical full employment. He therefore advocated for governments intervention in the economy. He also advocated for the use of fiscal policy to address economic problems. This paper analyzed both the classical and Keynesian policy prescription and came to the conclusion that the Keynesians prescription of government’s intervention in the  economy is necessary. The use of fiscal policy as prescribed by the  Keynesian is more relevant to a developing economy like Nigeria.