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Impact of Monetary Policy on Economic Growth in Nigeria

DOI: 10.4236/oalib.1104320, PP. 1-12

Subject Areas: Economics

Keywords: Monetary Policy, Economic Growth, Engle-Granger, Instruments

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Abstract

The paper examined the impact of monetary policy on economic growth in Nigeria by developing a model that is able to investigate how monetary policy of the government has affected economic growth through the use of multi-variable regression analysis. We proxied the variables of monetary policy instruments to include: Money Supply (MS), Exchange Rate (ER), Interest Rate (IR), and Liquidity Ratio (LR). Economic growth was represented by Gross Domestic Product (income) at constant prices. Unit root test was conducted and all our estimating variables were stationary at first difference except the component of interest rate which shows that our model interpretation would not be spurious and a true representation of the relationships that exists between the explained and explanatory variables. Error Correction Model was introduced in our estimation in order to have a parsimonious model. From our result, two variables (money supply and exchange rate) had a positive but fairly insignificant impact on economic growth. Measures of interest rate and liquidity ratio on the other hand, had a negative but highly significant impact on economic growth which supports the assertion by Busari et al. (2002) that monetary policies are better suited when they are used in targeting inflation rather than in stimulating growth. In addition, Engle-Granger co-integration test was done and showed the existence of a long run relationship between monetary policy and economic growth in Nigeria. Finally, granger causality test was done on our variables and the results showed the existence of a uni-directional causality between money supply and economic growth, economic growth granger causing liquidity ratio and exchange rates while a bi-directional causality exists between interest and economic growth. We recommend that partial autonomy should be replaced with full autonomy for the central banks in Nigeria which is invariably subjected to government interference and its politics. Finally, monetary policies should be used to create a favorable investment climate by facilitating the emergency of market based interest rate and exchange rate regimes that attract both domestic and foreign investments.

Cite this paper

Ayodeji, A. and Oluwole, A. (2018). Impact of Monetary Policy on Economic Growth in Nigeria. Open Access Library Journal, 5, e4320. doi: http://dx.doi.org/10.4236/oalib.1104320.

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