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Cite The A rticle: A ugustine Okon Jacob, O kon Joseph Umo h, Ayara Kingdom Akpan (2022).
Effect s of Mon etary Pol icy on Econo mic Growth in Nigeria.
Econ omic Grow th
and E nvironme nt Susta inability , 1(1): 10-15
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ISSN: 2821-2975 (Online)
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RESEARCH ARTICLE
Economic Growth and Environment Sustainability
(EGNES)
DOI: http://doi.org/10.26480/egnes.01.2022.10.15
EFFECTS OF MONETARY POLICY ON ECONOMIC GROWTH IN NIGERIA
Augustine Okon Jacoba*, Okon Joseph Umohb, Ayara Kingdom Akpana
aDepartment of Economics, Obong University, Nigeria
bDepartment of Economics, University of Uyo, Uyo, Nigeria
*Corresponding author email: drjacob.ao@gmail.com
This is an open access article distributed under the Creative Commons Attribution License CC BY 4.0, which permits unrestricted use, distribution, and
reproduction in any medium, provided the original work is properly cited.
ARTICLE DETAILS
ABSTRACT
Article History:
Received 16 November 2021
Accepted 20 December 2021
Available online 23 December 2021
Despite the various monetary regimes that have been adopted by the Central Bank of Nigeria over the years,
inflation remains a major threat to Nigeria's economic growth. This study seeks to examine the relationship
between monetary policy and economic growth in Nigeria. Starting from the nature and direction of
causation, the Granger pair-wise causality model was used, while a multiple regression model was formulated
based on the theoretical background of the study. The error correction mechanism (ECM) method was used
to estimate the equation, to evaluate the inherent connectivity between monetary policy and economic
growth and also the impact of money supply, interest rate, and exchange rate on the rate of economic growth
in Nigeria. The result showed that there is a unidirectional causal relationship between money supply and
economic growth in Nigeria. Secondly, interest rates and exchange rates have a negative effect on economic
growth, while money supply has a positive effect on economic growth. As a result, the macroeconomic
variables that policymakers should regulate in order to reduce inflation and ensure economic growth in
Nigeria are the money supply, exchange rate, and interest rate.
KEYWORDS
Bank Policies, Credit Control, Exchange Rate, Expenditure, Inflation
1. INTRODUCTION
Since the establishment of the Central Bank of Nigeria in 1959, it has
continued to play the traditional role expected of a central bank, which is
the regulation of the stock of money in such a way as to promote social
welfare (Ajayi, 1999). This role is anchored on the use of monetary policy
that is usually targeted towards the achievement of full employment
equilibrium, rapid economic growth, price stability, and external balance.
Over the years, the major goals of monetary policy have often been the two
latter objectives; thus, inflation targeting and exchange rate policy have
dominated the CBN’s monetary policy focus based on the assumption that
these are essential tools for achieving macro-economic stability.
Folawewo and Osinubi describe monetary policy as a combination of
measures designed to regulate the value, supply, and cost of money in an
economy (Folawewo and Osinubi, 2006).
The objectives of monetary policy include price stability, the maintenance
of balance of payments equilibrium, the promotion of employment and
output growth, and sustainable development. These objectives are
necessary for the attainment of internal and external balance and the
promotion of long-term economic growth. Evidence from the Nigerian
economy shows that there has been a relationship between the stock of
money and economic growth or activity since the 1980s.Over the years,
Nigeria has been controlling her economy through variations in her stock
of money. Consequent upon the effect of the collapse of oil prices in 1981
and the B.O.P deficit experienced during this period, various methods of
stabilization, ranging from fiscal to monetary policies, were used. Interest
rates were fixed, and these were said to be beneficial to big borrowers
(farmers) (Odedokum, 1998). Thus, the notion that the stock of money
varies with economic activity applies to the Nigerian economy.
Tradable economic activities are "special" in developing countries. These
activities suffer disproportionately from the institutional and market
failures that keep countries poor. Sustained real exchange rate
depreciations increase the relative profitability of investing in tradables
and act in second-best fashion to alleviate the economic cost of these
distortions. That is why episodes of undervaluation are strongly
associated with higher economic growth. There exists a unique long-run
relationship between interest rates and economic growth. Thus, interest
rates are an important determinant of economic growth in Nigeria.
However, the deregulation of interest rates in Nigeria may not optimally
achieve its goals if those other factors which negatively affect investment
in the country are not also removed.
In general terms, monetary policy refers to a combination of measures
designed to regulate the value, supply, and cost of money in an economy
in consonance with the expected level of economic activity (CBN, 1992).
For most economies, the objectives of equilibrium, promotion of
employment and output growth, and sustainable development are
sufficient (Folawewo and Osinibi, 2006). These objectives are necessary
for the attainment of internal and external balance and the promotion of
long-term economic growth. The importance of price stability derives
from the harmful effects of price volatility, which undermines the ability
of policymakers to achieve other laudable macro-economic objectives.
There is indeed a general consensus that domestic price fluctuation
undermines the role of money as a store of value and frustrates investment
and growth. Empirical studies by on inflation, growth, and productivity
have confirmed the long-term inverse relationship between inflation and
growth (Ajayi and Ojo, 1981; Fisher, 1994). Typically, in periods of high
inflation, the time horizon of investors is very short and resources are
diverted from long-term investments to those with immediate returns and
Economic Growth and Environment Sustainability (EGNES) 1(1) (2022) 10-15
Cite The A rticle: Au gustine O kon Jacob , Okon Jo seph Umo h, Ayara Kingd om Akpan (2022). Effect s of Monetary Policy on Economi c Growt h in Niger ia.
Econ omic Gro wth
and E nvironme nt Susta inability, 1(1 ): 10-15
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inflation hedges, including real estate and currency speculation. It is
against this background that this study would investigate the effectiveness
of monetary policy in Nigeria, with a special focus on major growth
components.
The failure of the monetary policy to curb price instability has caused
growth instability as Nigeria’s record of development has been very poor.
Thus, the main thrust of this research is to evaluate the effectiveness of the
CBN’s monetary policy over the years. This would go a long way in
assessing the extent to which monetary policies have impacted on the
growth in Nigeria using the major objective of monetary policy as a
yardstick. The result of this research is crucial in evaluating the
performance of monetary policy to adopt appropriate measures that
would ensure the achievement of both primary and secondary goals of
monetary policy in Nigeria. The significance of the study will also be best
appreciated by considering the effectiveness and usefulness of monetary
policy measures in regulating the economy. In particular, the finding will
help in establishing the extent to which monetary policy has stabilized
prices in the Nigerian economy. The study will make suggestions and
recommendations that will enable the government, banks, depositors
(individual), non-financial institutions and authorities to solve the
problems facing monetary policy measures in the Nigerian economy.
2. THEORY
In an attempt to link money supply to economic growth, recent
contributors to the new economic growth literature have considered the
role of financial structure. This implies that the level of money stock drives
economic growth. These assertions will strictly depend on several
macroeconomic variables. According to the potential effect of financial
depth (money in circulation) on economic growth can manifest itself in
three ways: (a) improved efficiency of financial intermediation, (b)
improved efficiency of capital stock, and (c) increased national savings
rate (Motiel, 1995). Bardhan provides a succinct statement of the
historical perspective of the issues involved and discusses the various
implications of the received interest in monetary aggregates in the
determination of the level of economic growth in developing countries
(Bardhan, 1996). Prior to the publication of paper "Economic Growth and
Income Inequality," "economic development and growth were guided by
the belief that the benefits of economic growth would eventually trickle
down in such a way as to affect the velocity of the monetary aggregate
(Kuznets's, 1995).
Modern macro-economic theories of money and economic development
seem to agree that there exists a systematic relationship between money
and economic development (Bemanke, 1995). However, empirical
researchers have largely focused on addressing two issues: first, to
examine if money could forecast output given the predictive power of past
values of output. If so, the second issue is to examine if such a relationship
is stable over time or not. Some researchers have found evidence of the
predictive ability of monetary aggregates (Ekpo and Osakwe, 1991).
However, some of these studies argue that such a relationship seems to
have changed over time. Using evidence from South African data, a
researcher disagrees with the observed causality that runs from money to
income (Hum, 1993). He concludes by stating that money supply and
financial deepening are strongly related to growth and inequality. In
Nigeria, however, the influence of money supply on economic growth can
only be taken with a mixed reaction.
However, several studies have confirmed the significance of money supply
and economic growth. Between 1971 and 1975, the growth rate of the
economy, measured by real GDP, ranged from 21.3% in 1971 to 3.0% in
1975. By 1981, the real GDP was down by 26.8% and remained negative
till 1984. A simple variance analysis shows that between 1971 and 1986,
the mean spread of the GDP was 108.6. However, between 1986 and 1994,
the real GDP was much higher before deregulation, while it fell during and
after the deregulation of the economy. Before deregulation in 1986, both
M1 and M2 had little correlation with the growth of real GDP. M2 was
observed to have a variance of 362.6 and a correlation coefficient of 0.21.
The period 1986–94 had a lower correlation of 0.1 between broad money
(M2) and the growth of real GDP. The mean spread of M2 was 289.2 as
against 108.7 for real GDP. The correlation between M1 and GDP between
1970 and 1986 stood at 0.22, and for 1986–94, it was 0.33. In essence, the
above descriptive analysis does not suggest any strong relationship
between monetary aggregates and economic growth in Nigeria. while
attempting to identify the appropriate definition of money in Nigeria.
Asogu examined the influence of money supply and government
expenditure on gross domestic product (Asogu, 1998). On annual and
quarterly time series data from 1960 to 1995, he applied the St. Louis
model.He finds money supply and exports to be significant. This finding,
according to Asogu, corroborates the earlier work of (Ajayi, 1974). While
examining the interaction between money and output in Nigeria between
the periods 1960–1995, the model assumed the irrelevance of anticipated
monetary policy for short-run deviations of domestic output from its
natural level. The result suggests that unanticipated growth in money
supply would have a positive effect on output. A clear examination of the
above shows that there is no general agreement on the determinant of
economic growth in the Nigerian economy. Findings show that there is a
clear relationship between money supply and economic growth (Iyoha,
1969). Others in Nigeria who have confirmed a strong relationship
between money supply and growth include (Odedokun, 1996; Ojo, 1993;
Owofe and Onafowora, 2007).
Adefeso and Mobolaji employed the Jahasen maximum likelihood co-
integration procedure to show that there is a long-run relationship
between economic growth, degree of openness, government expenditure,
and M2 (Adefeso and Mobolaji, 2010). They observed that monetary policy
exerts a significant impact on economic activity in Nigeria (Kogar, 1995).
They examined the relationship between financial innovations and
monetary control and concluded that in a changing financial structure,
central banks cannot realize efficient monetary policy without setting new
procedures and instruments in the long run, because profit-seeking
financial institutions change or create new instruments in order to evade
regulations or respond to the economic conditions in the economy.
Examining the evolution of monetary policy in Nigeria in the past four
decades observed that though monetary management in Nigeria has been
relatively more successful during the period of financial sector reform,
which is characterized by the use of indirect rather than direct monetary
policy tools, the effectiveness of the monetary policy has been undermined
by the effects of fiscal dominance, political interference, and the legal
environment in which the Central Bank operates (Resheed, 2011).
3. RESEARCH DESIGN
This study adopts a quantitative method to evaluate the empirical
evidence of the effect of monetary policy on economic growth in Nigeria.
The method of analysis has been an econometric technique using a
multiple regression model that is derived from the Keynesian IS-LM
model, which is the economic theory that this study is based on. In drawing
the empirical conclusion based on the specific objectives of this study, we
approached the methodology thus:
Objective 1 was analyzed by using the Granger causality test to ascertain
the causal relationship between the exchange rate and economic growth
in Nigeria. The Granger causality test is a statistical hypothesis test for
determining whether one time series is useful in forecasting another. In
other words, it is a test to check if the action or performance of one
variable has an effect or causes the existence of another.
The long and short-run relationships between monetary policy and
economic growth in Nigeria were examined using the error correction
mechanism (ECM). In statistics, an error correction model is a dynamical
system with the characteristic that the deviation of the current state from
its long-run relationship will be fed into its short-run dynamics.
An error correction model is not a model that corrects the errors in
another model. Error Correction Models (ECMs) are a category of multiple
time series models that directly estimate the speed at which a dependent
variable Y returns to equilibrium after a change in an independent variable
X. ECMs are a theoretically driven approach useful for estimating both the
short-term and long-term effects of one time series on another. Thus, they
often mesh well with our theories of political and social processes. ECMs
are useful models when dealing with co-integrated data, but they can also
be used with stationary data.
The last objective was analyzed by ordinary least squared (OLS) to
determine the relationship between monetary policy and the general price
level in Nigeria. Ordinary Least Squares (OLS) or Linear Least Squares
(LLS) is a method for estimating the unknown parameters in a linear
regression model. This method minimizes the sum of squared vertical
distances between the observed responses in the dataset and the
predicted responses by the linear approximation. The resulting estimator
can be expressed by a simple formula, especially in the case of a single
regressor on the right-hand side.
The OLS estimator is consistent when the regressors are exogenous and
there is no perfect multicollinearity, and optimal in the class of linear
unbiased estimators when the errors are homoscedastic and serially
uncorrelated. Under these conditions, the method of OLS provides a
minimum variance mean unbiased estimation when the errors have finite
variances. Under the additional assumption that the errors are normally
distributed, OLS is the maximum likelihood estimator and has the best
linear unbiased estimator.
Economic Growth and Environment Sustainability (EGNES) 1(1) (2022) 10-15
Cite The A rticle: Au gustine O kon Jacob , Okon Jo seph Umo h, Ayara Kingd om Akpan (2022). Effect s of Monetary Policy on Economi c Growt h in Niger ia.
Econ omic Gro wth
and E nvironme nt Susta inability, 1(1 ): 10-15
.
3.1 Description Of the Model
In this section, we postulate a model that seeks to examine the effects of
some selected monetary policy variables on economic growth in Nigeria.
Our specification of a growth model is routed through the Keynesian IS-
LM model, a macroeconomic model that graphically represents two
intersecting curves, called the IS and LM curves. The investment/saving
(IS) curve is a variation of the income expenditure model incorporating
market interest rates (demand for this model), while the liquidity
preference/money supply equilibrium (LM) curve represents the amount
of money available for investing (supply for this model). The model
attempts to explain the investing decisions made by investors given the
amount of money they have available and the interest rate they will
receive. Equilibrium occurs when the amount of money invested equals
the amount of money available for investing. The IS curve tells you all
combinations of Y and r that equilibrate the output market, given that
firms are willing to supply any amount that’s demanded. That is, the IS is
the set of all Y and r combinations that satisfy the output market
equilibrium condition that total demand, given income Y and the cost of
borrowing r, must equal total supply.
(1)
Notice the Y on the left-hand side stands for income (because consumption
demand depends on income), while the Y on the right-hand side stands for
total supply. We are justified in using the same symbol for both things
because, according to the basic national income accounting identity,
whatever quantity is supplied creates income of the same amount. In turn,
total demand ( can be broken up into the sum of consumption demand,
investment demand, government demand, and net foreign demand:
(2)
Where NX stands for net exports (that is, exports minus imports), how
much more do foreign countries demand from us than we demand from
them? I stand for planned investment, and G stands for government
spending.
The LM curve tells you all combinations of Y and r that equilibrate the
money market, given the economy’s nominal money supply M and price
level P. That is, the LM curve is the set of all Y and r combinations that
satisfy the money market equilibrium condition. Real money demand
must equal the given real money supply.
(3)
Notice that the real money supply on the right-hand side is fixed when
drawing the LM. Any change in the real money supply shifts the entire
curve. Assuming real money demand depends positively on the amount of
real transacting Y and negatively on the opportunity cost of holding money
r, the LM is an upward-sloping curve, with steepness depending on how
sensitive real money demand is to changes in r. In the model, consumption,
C, is determined by the level of income (money supply), investment by the
cost of capital and interest rate, and government spending is determined
by the exchange rate.
Therefore, we specify our models as;
(4)
Where Y = national income measured by Gross Domestic Product (GDP),
GEX = government expenditure, MS = money supply measured by broad
money M2, INT = Interest rate, EXCH = exchange rate, INFL = inflation rate.
In the log form we have;
(5)
For estimation procedure equation (5) will be written as
(6)
Where GDP = Gross Domestic Product, GEX = government expenditure, MS
= money supply measured by broad money M2, INT = interest rate, EXCH
= exchange rate, INFL = inflation rate, = error term, to = parameter
estimators (coefficient).
Also, to examine the impact of monetary policy on the general price level
in Nigeria, we formulated the second model base on the equation of money
thus
(7)
Where INF = inflation rate, GEX = government expenditure, = error
term, to = parameter estimator (coefficient)
3.2 Data
The data used in this study is a secondary annual time series covering
1980–2019. The basic data for this analysis are GDP, money supply,
government infrastructure spending, labor force, interest rates, and
exchange rates. These data were collected from the statistical bulletin, a
publication of the Central Bank of Nigeria.
4. PRESENTATION OF EMPIRICAL RESULT
To test for hypothesis one which states that there is no causal relationship
between exchange rate and economic growth in Nigeria, we use the
Granger pair-wise causality test. The result is shown below:
Table 1: Granger causality test result
Null Hypothesis
Obs
F-Statistics
Probabil
ity
INTR does not Granger cause GDP
36
0.06579
0.93649
GDP does not Granger cause INTR
1.56636
0.22861
M2 does not Granger cause GDP
36
232.192
0.00000
GDP does not Granger cause M2
1.20401
0.31680
EXCH does not Granger cause GDP
36
1.64485
0.21325
GDP does not Granger cause EXCH
0.18802
0.82976
INFL does not Granger cause GDP
36
0.27213
0.76398
GDP does not Granger cause INFL
0.22946
0.79662
GEX does not Granger cause GDP
36
12.4508
0.00018
GDP does not Granger cause GEX
12760.1
0.00000
M2 does not Granger cause INTR
36
1.41625
0.26143
INTR does not Granger cause M2
0.14578
0.86508
EXCH does not Granger cause
INTR
36
5.85800
0.00820
INTR does not Granger cause
EXCH
1.28405
0.29455
INFL does not Granger cause INTR
36
0.91985
0.41165
INTR does not Granger cause INFL
1.68080
0.20659
GEX does not Granger cause INTR
36
1.09904
0.34876
INTR does not Granger cause GEX
0.00918
0.99087
EXCH does not Granger cause M2
36
0.54347
0.58744
M2 does not Granger cause EXCH
2.90401
0.07344
INFL does not Granger cause M2
36
0.27990
0.75820
M2 does not Granger cause INFL
0.66487
0.52320
GEX does not Granger cause M2
36
3.21390
0.05726
M2 does not Granger cause GEX
15.5731
0.00004
INFL does not Granger cause
EXCH
36
0.73105
0.49141
EXCH does not Granger cause
INFL
2.53461
0.09948
GEX does not Granger cause EXCH
36
4.46592
0.02196
EXCH does not Granger cause GEX
0.07309
0.92971
GEX does not Granger cause INFL
36
1.01911
0.37542
INFL does not Granger cause GEX
0.22252
0.80207
The Granger causality test, as shown in table 1, reveals that there is a
bidirectional relationship between government expenditure and money
supply in the Nigerian economy. This implies that the level of government
expenditure influences the level of money supply and vice versa. For Gross
Economic Growth and Environment Sustainability (EGNES) 1(1) (2022) 10-15
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Econ omic Gro wth
and E nvironme nt Susta inability, 1(1 ): 10-15
.
Domestic Product (GDP) and money supply, there is a unidirectional effect
from money supply to GDP, but GDP does not cause money supply in the
model. This implies that monetary policy in Nigeria has a causal
relationship with economic growth. It is observed from the result that
there is no causal relationship between the exchange rate and GDP in the
Nigerian economy, while money supply has a unidirectional relationship
with the exchange rate. In other words, the money supply's cause, the
exchange rate, is a leakage to our economy as we import more than we
export in the international market.
Also, the result shows that the exchange rate causes inflation in our
economy while government expenditure causes the exchange rate. Hence,
there is a unidirectional effect between government expenditure and the
exchange rate; while the exchange rate does not cause government
expenditure, there is a unidirectional effect from the exchange rate on
inflation. Other pairwise comparisons show that the money supply does
not influence interest rates in the economy. Therefore, we accept the null
hypothesis, which states that there is no significant causal relationship
between the exchange rate and economic growth in Nigeria. The second
hypothesis of the study is tested using the Error Correction Model (ECM)
to determine the impact of monetary policy on the Nigerian economy. The
result is depicted below,
Table 2: Results of Error Correction Model (ECM)
Dependent Variable: log (GDP)
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
-0.657338
0.492976
-1.333408
0.1990
INFL
0.008515
0.004969
1.713474
0.1038
Log (GEX)
0.297813
0.221009
1.347515
0.1945
Log (M2(-1))
-1.241171
0.698962
-1.775736
0.0927
INTR (-1)
0.018520
0.015525
1.192925
0.2484
INFL (-1)
-0.005459
0.005440
-1.003390
0.3290
Log (GEX (-1))
-0.776171
0.195963
-3.960803
0.0009
Log (M2(-2))
2.909359
0.775236
3.752870
0.0015
INFL (-2)
0.005115
0.004461
1.146727
0.2665
EXCH (-2)
-0.005414
0.001833
-2.954011
0.0085
ECM1 (-1)
-0.183569
0.304554
-0.602747
0.5542
R-squared
0.988826
Mean dependent var
14.74559
Adjusted R-squared
0.982619
S.D. dependent var
2.387577
S.E. of regression
0.314771
Akaike info criterion
0.807755
Sum squared resid.
1.783457
Schwarz criterion
1.326385
Log likelihood
-0.712453
F-statistic
159.2953
Durbin-Watson stat
2.118644
Prob (F-statistic)
0.000000
The third hypothesis which has to do with the impact of monetary policy on the general price level was tested using the estimated model below:
Table 3: Ordinary Least Square Estimate Result
Dependent Variable: log (GDP)
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
28.86857
18.43460
1.565999
0.1330
D (EXCH)
0.189814
0.177176
1.071327
0.2968
Log (GEX)
2.541168
1.943255
1.307686
0.2058
D (INTR)
-1.794114
0.829351
-2.163274
0.0428
Log (M2)
-8.036912
3.074447
-2.614100
0.0166
Log (D(GDP))
4.185209
2.360196
1.773246
0.0914
R-squared
0.739536
Mean dependent var
20.54840
Adjusted R-squared
0.674420
S.D. dependent var
18.78603
S.E. of regression
17.06925
Akaike info criterion
8.711609
Sum squared resid.
5827.188
Schwarz criterion
9.001939
Log likelihood
-107.2509
F-statistic
32.05635
Durbin-Watson stat
1.969644
Prob (F-statistic)
0.003942
From the result above, it is discovered that there is a negative impact
between monetary policy instruments and the general price level in
Nigeria from 1980 to 2019, except for the exchange rate. Therefore, we
accept alternative hypothesis 3, which states that there is a significant
impact between monetary policy and the general price level in Nigeria.
4.1 Diagnostic Test Results
We conducted different diagnostic tests to ascertain the statistical quality
of our variables and the estimated model. Some of these tests include:
1. Unit root test of stationary, the table below shows the result
Table 4: Unit Root Test
Variable
ADF
Level
PP
Level
GDPG
-7.33665
I (0)
-3.60201*
I (I)
M2G
-5.8601
I (I)
-8.62759
I (0)
GEXFG
-5.81261
I (I)
-3.85946
I (0)
INFLG
-18.4497
I (I)
-3.48784*
I (I)
EXCHG
-7.71683
I (0)
-3.87965
I (0)
INTRG
-5.90558
I (0)
-6.853481
I (0)
Critical Value:
1% level -3.646342
5% level -2.954021
10% level -2.615817
*at 5% level
Critical Value:
1% level -3.596616
5% level -2.933158
10% level -2.604867
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.
The result of the unit root test of stationary shown in table 4 above shows
that all the variables are not integrated at the same level of I(0). Hence, the
variables are not stable, and for this reason, we cannot use the Johansen
co-integration test for the variables in the model. Therefore, we will use
the Engle Granger two-stage procedure to test for co-integration in order
to check if there exists a long-run relationship among the variables in the
model. In other words, the error correction mechanism is the method that
is suitable for this study.
2. Serial correlation test: Using Breusch Godfrey LM we tested for serial
correlation of the variables in the model. The table below depicts the
result,
Table 5: Result of serial correlation
F-statistic = 0.005302
Obs*R-squared = 0.005998
Probability = 0.942338
Probability = 0.93267
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
-2.829086
44698868
-0.063292
0.9499
GEXFG
1.296847
19.79454
0.065515
0.9481
EXCHG
-1.350669
41.71004
-0.032382
0.9743
M2G
0.264183
15.12504
0.017467
0.9862
RESID (-1)
0.087434
1.200818
0.072812
0.9423
R-squared = 0.000139
Adjusted R-squared = -0.105109
S.E. of regression = 4.0184066
Sum squared resid = 6.14E=16
Log likelihood = -811.2428
Durbin-Watson = 1.966578
Mean dependent var = 8.66E -09
S.D. dependent var = 3.822533
Akaike info criterion = 37.96478
Schwarz criterion = 38.16957
F-statistic = 0.001325
Prob (F-statistic) = 0.99996
In table 5, the top part of the output presents the test statistic and
associated probability values. The test regression used to carry out the test
is reported below the statistics. The statistic labeled "Obs*R-squared" is
the LM test statistic for the null hypothesis of no serial correlation. The
approximately one probability value in the auto-regressive conditional
heteroscedasticity LM test, whose result is shown in table 6, strongly
indicates that there is no presence of heteroskedasticity in the residuals.
Table 6: Arch result
F-statistic = 0.016317
Obs*R-squared = 0.017126
Probability = 0.898995
Probability = 0.895880
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
1.49E+15
1.30E+15
1.140989
0.2607
RESID2 (-1)
-0.020188
0.158039
-0.127740
0.8990
R-squared = 0.000408
Adjusted R-squared = -0.024582
S.E. of regression = 8.31E+15
Sum squared resid = 2.76E+33
Log likelihood = -1598.121
Durbin-Watson = 1.999608
Mean dependent var = 1.46E+15
S.D. dependent var = 8.21E+15
Akaike info criterion = 76.19625
Schwarz criterion = 76.27899
F-statistic = 0.016317
Prob (F-statistic) = 0.898995
5. DISCUSSION
The regression analysis was conducted to check the effect of monetary
policy on economic growth in Nigeria. As a result, using an error
correlation mechanism, money supply in the second lag year promotes
economic growth. This indicates that the growth of the money supply
contributes to economic growth. On the other hand, monetary policy
instituted by the monetary authorities is yielding good fruit for the
economy. The interest rate, as one of the monetary instruments, is not
promoting economic growth. This implies that an increase in the interest
rate will cause the cost of capital for investment to be costly and hence
reduce the level of domestic investment in the economy, which in turn
reduces economic growth and slows down the level of economic activity.
Also, the exchange rate in the result inversely affects the growth of the
economy in the country.
This could be attributed to the fact that Nigeria’s economy is facing a
balance of payment deficit in the international market, which has caused a
high exchange rate as our currency depreciates as a result of the
unfavorable balance of trade. This invariably affects the growth of our
economy adversely. Though this macroeconomic variable is not
statistically significant in our estimated model, it captures the reality of
our Nigerian economy. It is quite unfortunate to note from the result that
the growth of government expenditure in the lagged year in the economy
does not promote economic growth in Nigeria. But it promotes economic
growth in the current year. Interestingly, the growth of the inflation rate
in the country promotes the growth of the economy in the second lagged
year.
This macroeconomic variable is also significant at a 5% level of
significance. Lastly, the error correction variable, which measures the
speed of adjustment in the system, shows that any disequilibrium in the
system will be corrected by 18.4% in the following year, and it will have
the correct negative sign. The coefficient of determination shows that
98.2% of the variation in the Nigerian economy is explained by the model,
while only 1.8% of the variation in the economy is explained by variables
outside the model (error term). This is a good goodness-of-fit for the
model. Moreover, the Durbin-Watson statistic in the results shows that
there is no serial correlation in the model given in the results.
6. CONCLUSION
This study sought to appraise the relationship between monetary policy
and economic growth in Nigeria, spanning 1980–2019. Three research
hypotheses were formulated in order to give this study a direction.
Relevant literature was reviewed based on the theories explaining the
subject matter and determining the major variables of the study. The
research design used for this study was an exploratory and quantitative
research design. Econometric techniques were the quantitative tools used
to conduct the empirical analysis in Nigeria’s context. Starting from the
nature and direction of causation, the Granger pair-wise causality model
was used, while a multiple regression model was formulated based on the
theoretical background of the study. An Error Correction Mechanism
(ECM) method was used to estimate the equation to evaluate the inherent
connectivity between monetary policy and economic growth.
In particular, it undertakes and approaches to identify the determinants of
Nigeria’s economic growth, the influence of macroeconomic variables or
monetary policy instruments, and the investment effect on growth. Firstly,
there is a unidirectional effect or relationship between money supply and
economic growth in Nigeria. Secondly, interest rates have a negative effect
Economic Growth and Environment Sustainability (EGNES) 1(1) (2022) 10-15
Cite The A rticle: Au gustine O kon Jacob , Okon Jo seph Umo h, Ayara Kingd om Akpan (2022). Effect s of Monetary Policy on Economi c Growt h in Niger ia.
Econ omic Gro wth
and E nvironme nt Susta inability, 1(1 ): 10-15
.
on economic growth. The coefficient of determination shows that 98.2%
of the changes in Nigeria’s economy are in the model, while only 1.8% of
the variation in the economy is caused by variables outside the model
(error term). The proportion shows that the model has goodness-of-fit and
strong explanatory power. Thirdly, government expenditure has a positive
effect on economic growth and is statistically significant at a 5% level of
significance.
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