Analysis of the Effects of Monetary Policy on Economic Growth in Nigeria (1980-2018)

International Journal of Research and Innovation in Applied Science (IJRIAS) | Volume V, Issue XII, December 2020 | ISSN 2454–6186

Analysis of the Effects of Monetary Policy on Economic Growth in Nigeria (1980-2018)

Daniel Tersoo Aule^1*, Phillip Zakka Bakut², James T. Ihum³, Ibrahim Haddy⁴

¹Research Officer at Genius Global Consulting and Former Postgraduate Student, Department of Economics, Bayero University, Kano-Nigeria

²Special Assistant, Research and Documentation, Kaduna State Government.

³Senior Research Officer, Economic Policy Analyst and Consultant at Genius Global Consulting, Former Postgraduate student, Department of Economics, LUBS, University of Leeds, UK

ABSTRACT:-This study empirically investigates the effectiveness of monetary policy with the aim of examining the effects of money supply and exchange rate on economic growth in Nigeria. The study utilises annual time series data on four germane variables; Gross Domestic Product, broad money supply, exchange rate and foreign reserve from 1980 to 2018. To obtain a robust and reliable results from the data employed in the empirical investigation, various economic techniques like Augmented Dickey Fuller Unit Root Test, Johansen Cointegration Test and Vector Error Correction Model (VECM) were employed and the following information surfaced: None of the variables was stationary at level meaning they all have unit roots. But all the variables became stationary after first difference. The study found that except exchange rate, all the other monetary instruments reflect direct impacts on economic growth in the long run. Broad money supply has positive and significant impact on economic growth in the long-run, exchange rate has a negative and significant impact on economic growth rate in the long-run, and foreign reserve has positive and insignificant impact on economic growth in the long-run. In terms of short run, the study found that broad money supply has a negative relationship with GDP growth rate at lag four. The short-run result also shows a negative relationship between exchange rate and economic growth rate; and with foreign reserve at lag four. Therefore, the study recommends stabilization in exchange rate, proper regulation of money supply and prudential use of the accumulated reserve. Hence, it concludes that maintenance of economic growth rate using monetary policy measures largely depend on the stabilisation of both internal and external values of Naira; proper coordination of monetary and fiscal policies among others..

1. Introduction
The attainment of macroeconomic goals especially economic growth has always been seen as a principal macroeconomic policy objective of every economy whether developed or developing given the vulnerability of macroeconomic variables to fluctuations in the economy. As a result, economic planners who are responsible for policy guidance formulate and implement policies with a view to achieving sustainable growth rate in output. Conceptually, macroeconomic policies involve the use of monetary and fiscal policies to manage the economic activities. Monetary policy centred primarily on how monetary authorities use monetary instruments at their disposal to influence the decision of economic agents with the intention of enhancing macroeconomic stability.

Despite the attention given to monetary policies in Developing countries, African countries did not escape the global wave of monetary dominance that emerged in the early 1970s in the face of hyper-inflation fuelled in part by the oil crisis. This and other eras of financial crisis have deepened the fluctuations in economic growth rate of some countries like Nigeria. The Nigeria’s apex bank has noted that containing inflationary pressures and anchoring inflation expectations are central in stimulating economic growth. In practice, the Central Bank of Nigeria has pursued this by largely focusing on operational and intermediate targets of monetary variables to enhance growth in the country’s Gross Domestic Product (GDP).

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