Effect of Monetary Policy on Economic Growth in Nigeria (1986-2017)

Abstract

The study assessed the effect of monetary policy on economic growth in Nigeria from 1986 to 2017. It used quarterly time series data spanning the period between 1986Q1 and 2017Q4. The structural vector autoregression (SVAR) analysis was used to assess the effect of monetary policy following the framework of inflation targeting (IT) on economic growth in Nigeria. It further employed the Granger causality test to ascertain the direction of causation between monetary policy and economic growth in the country. Findings from the study revealed that monetary policy had a positive effect on economic growth in Nigeria. The monetary policy rate (MPR) positively affected growth through the periods under investigation. Its effect was however minimal only accounting for a maximum of 3 per cent of changes in the growth. Also, the broad money supply (M2) had a positive effect all through the period on economic growth, also only accounting for a maximum of 7 per cent of changes in economic growth. This result was supported by the causality test that found causation running from MPR and M2 to economic growth, and also causation running from MPR and the M2 to inflation. The study concluded that the inflation targeting (IT) framework was however a good monetary policy tool, but there is need for other instruments which combines quantity-based and price-based nominal anchors that the central bank can control effectively to improve the policy targets, while deepening financial intermediation for seamless pass through from policy rate to the economy.