Impact of Monetary Policy Instruments on Economic Growth in Nigeria

International Journal of Research and Scientific Innovation (IJRSI) | Volume VI, Issue VI, June 2019 | ISSN 2321–2705

Impact of Monetary Policy Instruments on Economic Growth in Nigeria

Ayunku, Peter Ego¹ and Eze Onyekachi Richard²

¹Lecturer, Department of Finance and Accountancy, Niger Delta University, Wilberforce Island, Bayelsa State-Nigeria
²Lecturer, Department of Banking and Finance, Ebonyi State University, Abakaliki-Nigeria.

Abstract:- In Nigeria context, the economy is faced with unemployment, low investment, high interest rate and high rate of inflation. The purpose of this paper was to ascertain the impact of monetary policy instruments on economic growth in Nigeria. The study spanned from 1970 – 2011. It has been postulated that if monetary policy instruments are effective, the economy will grow well. A stationary test was carried out using Augmented Dickey-Fuller (ADF) and Phillip-Perron Test (PP) and stationary found at first difference at 5% level of significance. The Johansen-Juselius co-integration technique employed in this study proved to be superior to the Engle and Granger (1987) approach in assessing the co-integrating properties of variables, especially in a multivariate context. The result of the test indicates 1 cointegration equation at 5 percent level of significance. The study also applied Vector Error Correlation Model (VECM) to determine the short run relationship between monetary policy instruments and economic growth in Nigeria. The result of our analysis shows that monetary policy instruments significantly influence the rate of economic growth in Nigeria. The study also found that long-run relationship exists between monetary policy instruments and economic growth in Nigeria. we therefore recommend that, having seen that there exist a long-run relationship between GDP and explanatory variables (M2, INRATE and EXRATE) through the use of co-integration test, it implies that government can adopt contractionary money policy as this will help the monetary authorities to reduce money supply in order to force up interest rate and thereby curtailing inflation; government should sustain the current economic reform and maintain sound fiscal and monetary policy so that inflation trends to single digit on a sustain basis, interest rates will inevitably come down to single digit as has happened in some developed economies in the world; and monetary policy instruments should be used to fight against high rate of inflation in Nigeria.

Keywords: Monetary Policy Instruments, Economic Growth, Money Supply, Stationarity Test, Co-integration, Error Correction Model.

I. INTRODUCTION

Developing countries growth policies are better delivered as full packages since fiscal and monetary policies are inextricable, except in terms of the instruments and implementing authorities. However, monetary policy appears more potent in correcting short term macroeconomic maladjustment because of the frequency in applying and altering the policy tools, relative ease to its decision process and sheer nature of the sector which propagate its effect to the real economy-the financial system.

Read More