Effectiveness of Monetary Policy in Stimulating Economic Growth in Nigeria

Description

– Effectiveness of Monetary Policy in Stimulating Economic Growth in Nigeria –

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Abstract

This study investigates the effectiveness of monetary policy in stimulating economy growth in Nigeria using AK production Function and Vector Autoregressive (VAR) model.

The empirical evidence depicts that economic growth in Nigeria is influenced by money supply, electric power consumption, gross fixed capital formation and trade openness. This shows that monetary policy is effective in maintaining economic growth on the long run.

The impulse response function revealed that economic growth (GDP) respond to itself and does not respond to other variables like Consumer Price Index (CPI), Broad Money Supply (M2), Interest Rate (IR), Exchange Rate (ER) in some period, while in some period economic growth (GDP) respond to itself and other variable.

The Granger causality test showed that there exist unidirectional, bilateral and independence causality. Thus Nigerian government through its monetary authorities should fine-tune the economy by incorporating other policies that will influence economic growth not only in the long run but also, in the short run period.

Introduction

1.1 Background of the Study

An issue which has occupied the minds of government for decades is the effectiveness of monetary policy in influencing economic variables.

Despite the lack of consensus among economists on how it actually works and on the magnitude of its effect on the economy, there is a remarkable strong agreement that monetary policy has some measure of effects on the economy (Udegbunam, 2003).

Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the level of economic activities.

It can be described as the art of controlling the direction and movement of monetary and credit facilities in pursuance of stable price and economic growth in an economy (CBN, 1992).

Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payment. However, emphases on techniques/ instruments to achieve those objectives have changed over the years.

There have been two major phases in the pursuit of monetary policy in Nigeria since the inception of the Central Bank of Nigeria, namely before and after 1986 structural adjustment programme (SAP).

The first phase (1959-1986) placed emphasis on direct monetary controls, while the second phase (1986-date) relies on market mechanisms or market-based controls.

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