The paper examined the
impact of monetary policy on economic growth in Nigeria by developing a model
that is able to investigate how monetary policy of the government has affected
economic growth through the use of multi-variable regression analysis. We proxied
the variables of monetary policy instruments to include: Money Supply (MS),
Exchange Rate (ER), Interest Rate (IR), and Liquidity Ratio (LR). Economic
growth was represented by Gross Domestic Product (income) at constant prices. Unit
root test was conducted and all our estimating variables were stationary at
first difference except the component of interest rate which shows that our
model interpretation would not be spurious and a true representation of the
relationships that exists between the explained and explanatory variables.
Error Correction Model was introduced in our estimation in order to have a
parsimonious model. From our result, two variables (money supply and exchange
rate) had a positive but fairly insignificant impact on economic growth.
Measures of interest rate and liquidity ratio on the other hand, had a negative
but highly significant impact on economic growth which supports the assertion
by Busari et al. (2002) that monetary
policies are better suited when they are used in targeting inflation rather
than in stimulating growth. In addition, Engle-Granger co-integration test was done
and showed the existence of a long run relationship between monetary policy and
economic growth in Nigeria. Finally, granger causality test was done on our
variables and the results showed the existence of a uni-directional causality
between money supply and economic growth, economic growth granger causing
liquidity ratio and exchange rates while a bi-directional causality exists
between interest and economic growth. We recommend that partial autonomy should
be replaced with full autonomy for the central banks in Nigeria which is
invariably subjected to government interference and its politics. Finally,
monetary policies should be used to create a favorable investment climate by
facilitating the emergency of market based interest rate and exchange rate
regimes that attract both domestic and foreign investments.
Ganev, G., Krisztina, M., Krzysztof, R. and Prsemyslaw, W. (2002) Transmission Mechanism of Monetary Policy in Central and Eastern Europe. Centre for Social and Economic Research, Report No. 52. https://doi.org/10.2139/ssrn.1432336
Amassoma, O., Ditimi, N., Nwosa, P. and Olaiya, S. (2011) An Appraisal of Monetary Policy and Its Effect on Macro Economic Stabilization in Nigeria. Journal Trends in Economics and Management Science, 2, 233-237.