Relative Impacts of Monetary Policy Instruments on Economic Growth in Nigeria

Abstract

The objective of this study is to empirically determine the impact of monetary policy instruments on economic growth in Nigeria with Autoregressive Distributed Lag Model (ARDL) and Vector Error correction model (VECM) as methodology, after necessary test on reliability of data are conducted. Also, due to the change in government policy i.e 2006 bank consolidation, test for structural stability was carried out using CUSUM, CUSUMSQ and Chow test. Standardized regression was used to find out the comparative or relative impacts of the monetary policy instruments (Monetary policy rate, Cash reserve ratio, and Exchange rate) on the target variable (Economic growth,). From the analysis of the model for both alternative sub periods, the coefficients of the estimated regression (for both ARDL and VECM) are not the same in the two sub periods. There are significant changes in the coefficients of the policy variables. This means that the 2006 structural reform in the financial sector in Nigeria brought changes in monetary policy rate, CRR , exchange rate and also changes in economic growth. Also, from the two sub periods CRR does not have any significant effects on economic growth in short run, but it has effects in the long run. In the short run, in both sub periods, monetary policy rate does not have significant effect on economic growth. Also in the long run, it does not have significant effects on economic growth in both sub periods. In the short run and long run, for both sub periods, exchange rate has a consistent negative and significant effect on economic growth in Nigeria. Hence, Economic growth is more sensitive to exchange rate compared to monetary policy rate and cash reserve ratio in Nigeria. However, since exchange rate has significant impact on economic growth, combined with the present structure of Nigeria economy, revaluation of naira (exchange rate revaluation), will surely promote drastic increase in output level in Nigeria.