Monetary policy and economic growth nexus in Nigeria

Abstract

Background: The extent to which monetary policies influenced macroeconomic variables especially price stability and ultimately economic growth has been a theme of discussion among scholars over the years, with no solid position. This non-definite stand thus beckons for more research on the issue.

Objective: This study sought to examine the effect of monetary policy on economic growth in Nigeria.

Methodology: Annual data sourced from Central Bank of Nigeria Statistical Bulletin covering the period 1971 to 2018. The data collected were analyzed using Ordinary Least Square method. The study also conducted the unit root and cointegration test to ascertain the fitness of the model.

Result: Long-run relationship exists among the variables and that some explanatory variables (Monetary policy rate, Interest rate, Investment to productive sector) presents a positive but non-significant effect on economic growth while real exchange rate has a negative impact on economic growth in Nigeria. However, monetary supply, which is another explanatory variable has a positive significant effect on economic growth.

Conclusion: On the overall, monetary policy is found to explain about 89% of the changes in economic growth in Nigeria.

Unique contribution: The study includes monetary policy rate which serves as the main tool of monetary policy targets and as well use GDP growth rate which is believed to be an adequate measure of economic growth as against ordinary GDP. This study also replaced external reserves and output of industrial production with investment since investment is theoretically postulated to have a direct influence from interest rates (both lending and deposit), which CBN monetary policy rates have a direct influence on.

Key Recommendation: The study recommends that government and relevant monetary authorities should make financial sector less volatile and ensure the effective monitoring of money supply levels, among others.