Reinvestigating in to the Nexus between Monetary Policy and Economic Growth in Nigeria

Abstract

Monetary policy has been driving force of economic prosperity in any economy of the world. However, in Nigeria, various empirical studies have found both positive and negative impact of monetary policy on economic growth. Thus this study is carried out to reinvestigate the nexus between monetary policy and economy growth in Nigeria from 1970 to 2020. Economic growth was proxy with Gross Domestic Product per capita (GDP), and Monetary Policy Rate (MPR), Real Interest Rate (RNT), broad Money supply (M2), Exchange Rate (EXR) as independent variables representing monetary policy, while Inflation Rate (INF) was introduced as control variable for this study. The study adopted Auto Regressive Diagnostic Lag and unit root test, co-integration test, granger causality test and VECM was conducted in this study. It was found that all variables were stationary and there is long term relationship between economic growth and monetary policy with high speed of adjustment between the long and short run fluctuation. The major findings show that broad money supply, real interest rate and monetary policy rate are positively significant except for monetary policy rate which is negative. Inflation rate and exchange rate were negatively significant with economic growth. Therefore, it was concluded that monetary policy has positive impact on Nigerian economy over the years in this study. The study recommends that the monetary authorities should pay attentions to broad money supply (M2), real interest rate and monetary policy rate because they are capable of influencing economic activities positively which leads to economic growth, among others.

Keywords: Monetary Policy, Economic Growth, GDP, Inflation Rate, Monetary Policy Rate, Broad Money Supply