AN ECONOMETRICAL ANALYTIC REVIEW OF MONETARY POLICY ON THE ECONOMIC GROWTH OF NIGERIA
Abstract
The natural log of the GDP was used as the dependent variables against the explanatory monetary policy variables: monetary policy rate, money supply, exchange rate, lending rate and investment. The time series data is the market-controlled period covering 1986 to 2016. The study adopted an Ordinary Least Squared technique and also conducted the unit root and co-integration tests. The study showed that long run relationship exists among the variables. In addition, the core finding of this study showed that monetary policy rate, interest rate, and investment have insignificant positive effect on economic growth in Nigeria. Money supply however has significant positive effect on growth in Nigeria. Exchange rate has significant negative effect on GDP in Nigeria. Money supply and investment granger cause economic growth, while economic growth causes interest rate in Nigeria. On the overall, monetary policy explains 98% of the changes in economic growth in Nigeria. Thus, the study concluded that monetary policy can be effectively used to control Nigerian economy and thus a veritable tool for price stability and improve output. Keywords: monetary policy; monetary policy rate; money supply; exchange rate; lending rate; investment; Nigeria. JEL Classification: E5
- Introduction
Monetary policy is a deliberate action of the monetary authorities to influence the quantity, cost and availability of money credit in order to achieve desired macroeconomic objectives of internal and external balances. The action is carried out through changing money supply and/or interest rates with the aim of managing the quantity of money in the economy. Thus, monetary policy as a technique of economic management to bring about sustainable economic growth and development has been the pursuit of nations and formal articulation of how money affects economic aggregates dates back the time of Adams Smith and later championed by the monetary economists. Since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth, price stability, equilibrium in balance of payments and host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to grow their economies. Economic growth could be defined as the increase in the amount of goods and services in a given country at a particular time. This of course indicates that when the real per capita income of a country increases over time, economic growth is taking place. A growing economy produces goods and services in each successive time period, showing that the economy’s productive capacity is at increase. Broadly, economic growth implies raising the standard of living of the people and reducing inequalities of income distribution . In Nigeria, monetary policy has been used since the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central bank Act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government, have grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. Two major periods have characterized monetary policy in Nigeria: the post-and pre-1986 periods. Before 1986, direct monetary control was used in achieving price stability in Nigeria, while the emphasis shifted to market mechanisms after the 1986 market liberalization [Uchendu, 2009]. Prior to 1986, direct monetary instruments such as selective credit controls, administered interest and exchange rates, credit ceilings, cash reserve requirements and special deposits to combat inflation and maintain price stability were employed. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Occasionally, special deposits were imposed to reduce the amount of excess reserves and credit creating capacity of the banks. In the above period, the monetary control framework seems to have failed to achieve the set monetary targets as their implementation became less effective with time. The rigidly controlled interest rate regime and the non-harmonization of fiscal and monetary policies may have contributed immensely to the adverse effect of constraining growth of the money and capital markets. In the Structural Adjustment Programme (SAP) era instead of relying on direct control mechanism for monetary policy, a shift to market-oriented reform was introduced for effective mobilization of savings and efficient resource allocation. Open market operation was the main instrument of the market-based framework. In Nigeria, monetary policy has been based on a medium-term perspective framework in recent times. The shift was to free monetary policy implementation from the problem of time inconsistency and minimize over-reaction due to temporary shocks. Policies have ranged from targeting monetary
