Effectiveness of Monetary Policy in Stimulating Economic Growth in Nigeria
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ABSTRACT
This study investigates the effectiveness of monetary policy in stimulating economy growth in Nigeria using AK production Function and Vector Autoregressive (VAR) model.
The empirical evidence depicts that economic growth in Nigeria is influenced by money supply, electric power consumption, gross fixed capital formation and trade openness. This shows that monetary policy is effective in maintaining economic growth on the long run.
The impulse response function revealed that economic growth (GDP) respond to itself and does not respond to other variables like Consumer Price Index (CPI), Broad Money Supply (M2), Interest Rate (IR), Exchange Rate (ER) in some period, while in some period economic growth (GDP) respond to itself and other variable.
The Granger causality test showed that there exist unidirectional, bilateral and independence causality. Thus Nigerian government through its monetary authorities should fine-tune the economy by incorporating other policies that will influence economic growth not only in the long run but also, in the short run period.
TABLE OF CONTENTS
Title Page – – – – – – – – – i
Certification – – – – – – – – – ii
Approval Page – – – – – – – – iii
Abstract – – – – – – – – – iv
Dedication – – – – – – – – – v
Acknowledgement – – – – – – – – vi
Table of Content – – – – – – – – vii
CHAPTER ONE: INTRODUCTION
1.1 Background Information – – – – – – 1
1.2 Statement of Problem – – – – – – 3
1.3 Objectives of the Study – – – – – – 6
1.4 Hypothesis – – – – – – – – 6
1.5 Significance of the Study – – – – – – 6
1.6 Scope of the Study – – – – – – – 7
1.7 Limitations of the study – – – – – – – 7
1.8 Organisation of the study – – – – – – 7
CHAPTER TWO: REVIEW OF LITERATURE
2.1 Conceptual Framework – – – – – – 8
2.2 Theoretical Literature – – – – – – – 9
2.2.1 Traditional Keynesian IS/LM Model – – – – – 11
2.2.2 The Mundell-Fleming Model – – – – – – 12
2.2.3 Tobin q’s Theory – – – – – – – 12
2.2.4 Monetary Transmission – – – – – – 13
2.3 Constraint of Monetary Policy – – – – – 15
2.4 Empirical Literature – – – – – – 16
2.5 Limitation of Previous Study – – – – – – 19
CHAPTER THREE: METHODOLOGY
3.1 Analytical Framework – – – – – – – 21
3.2 Theoretical Framework – – – – – – 23
3.3 Model specification – – – – – – – 25
3.4 Data and their Features – – – – – – 28
CHAPTER FOUR: DATA ANALYSIS AND EMPIRICAL RESULTS
4.1 Presentation of Pre-estimation test – – – – – 30
4.1.1 Cointegration Analyses – – – – – – 31
4.2 The Response of Monetary Policy to Shocks
In Monetary Policy Instruments – – – – – 34
4.3 Granger Causality Test – – – – – – 36
4.4 Evaluation of results – – – – – – – 37
4.4.1 Economic criteria – – – – – – – 37
4.4.2 Statistical criteria – – – – – – – 38
4.4.3 Economic procedure (tests) – – – – – – 40
4.5 Evaluation of working hypothesis – – – – – 42
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of The Findings – – – – – – 45
5.2 Conclusion and Lessons for Policy Issue – – – – 46
5.3 Policy Recommendation- – – – – – – 48
REFERENCES
INTRODUCTION
An issue which has occupied the minds of government for decades is the effectiveness of monetary policy in influencing economic variables.
Despite the lack of consensus among economists on how it actually works and on the magnitude of its effect on the economy, there is a remarkable strong agreement that monetary policy has some measure of effects on the economy (Udegbunam, 2003).
Monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the level of economic activities.
It can be described as the art of controlling the direction and movement of monetary and credit facilities in pursuance of stable price and economic growth in an economy (CBN, 1992).
Over the years, the objectives of monetary policy have remained the attainment of internal and external balance of payment. However, emphases on techniques/ instruments to achieve those objectives have changed over the years.
There have been two major phases in the pursuit of monetary policy in Nigeria since the inception of the Central Bank of Nigeria, namely before and after 1986 structural adjustment programme (SAP).
The first phase (1959-1986) placed emphasis on direct monetary controls, while the second phase (1986-date) relies on market mechanisms or market-based controls.
REFERENCES
Abiodun O.F. and Osinubi, T. S. (2006), “Monetary Policy and Macroeconomic Instability in Nigeria, A Rational Expectation Approach” © Kamala – Raj (2006). Social Science 12 (2):93-100 (2006).
Adesoye A.B., Maku O.A, and Atanda A.A (2012) “is Monetary Policy a Growth Stimulant in Nigeria? Vector Autoregressive Approach. MPRA Paper No. 35844.
Adibiyi (2005) Saving-Growth Relationship in Nigerian empirical Evidence. African Review of Money, Finance and Banking 159-178.
Agu,U and Evoh,C.J. (2011). Macroeconomic policy for full and productive and decent employment for all: The case of Nigeria, ILO Employment Working Paper No. 107
Ajayi S.I. (1975), “Evolution and Functions of Central Banks”. Central Bank of Nigeria and Economic and Financial Review, 37 (4): 11-27.
Alan J.A. and Yuriy G. (2011) “Measuring the output Responses to Fiscal Policy. NBER Working Paper No. 17447.
CSN Team.
