International Journal of Research and Innovation in Social Science (IJRISS) |Volume VI, Issue XI, November 2022|ISSN 2454-6186
An Assessment of the Impact of Monetary Policy on Economic Growth in Nigeria: Toda-Yamamoto Approach
Okosu, Napoleon David*; Okoduwa, Dorothy Ivie; Ita, Uyu Eyo and Egonu, Daniel Ikenna
Department of Economics, Veritas University, Abuja, FCT- Nigeria
*Corresponding Author
Abstract: This study interrogated the impact of monetary policy on economic growth in Nigeria using annual time series data from 1981 to 2020. The paper used the growth rate of gross domestic product (GRGDP) as the endogenous variable, while, broad money supply (MS2), monetary policy rate (MPR), Inflation (INFL), liquidity ratio (LDQR) and exchange rate (EXCH) were the exogenous variables and proxies for monetary policy. Data were obtained from the Central Bank of Nigeria’s Statistical Bulletin of various years and World Bank National Account Data. The study used descriptive statistics, performed a unit root test using Augmented Dickey-Fuller, Autoregressive Distributed Lag (ARDL) Bound test, and to test for causality, Toda Yamamoto was deployed. Finally, the Toda Yamamoto Causality test revealed that all the exogenous variables had bi-directional causality with economic growth except for the exchange rate that had uni-directional causality with economic growth. In the light of the findings, the study recommends that Broad Money Supply (MS2) should be adequately managed and manipulated to achieve the needy growth, in line with pursued monetary policy stance of the monetary authority. Also, the monetary authority and the government should vigorously pursue policies that would increase financial inclusion in Nigeria as it would enhance the effectiveness of the monetary policy.
Keywords: Monetary Policy, Economic Growth, ARDL, Toda-Yamamoto.
I. INTRODUCTION
Sustainable economic growth and development are undoubtedly one of the most challenging development issues in third-world countries today. Thus, the effectiveness of monetary policy in bringing about this growth and development through influencing macro-economic variables becomes an issue paramount and predominantly occupying the minds of government and researchers. Macro-economic policy objectives which change from time to time depending on the economic fortunes of a country may unlikely to be achieved if money and credit flows, volumes cost and direction are left unchecked to allocate themselves freely in an economy. Therefore, to ensure steady and sustainable economic growth and development are achieved as well as instill some level of sanity into a country’s financial system, not only the need for monetary policy becomes paramount and inevitable but also its effectiveness.
The effectiveness of monetary policy in output stabilization and controlling inflation remains an ongoing discourse (Sean, 2019;