ABSTRACT
The role of monetary policy in sustaining economic growth has been a highly researched subject. The aim of this study is to examine the relationship between monetary policy and economic growth in which the past studies have shown conflicting results in Nigeria. Quarterly time series data was collected from the Central Bank of Nigeria Statistical Bulletin and Website from 1981 to 2021. Motivated by the prevalence of misleading inference in time series occasioned by failure to account for structural breaks in series as volatile as macroeconomic variables in Nigerian specific studies, this study sought to find out whether structural breaks matter in studying the response of Economic growth to monetary policy shocks. The study employed Zivot-Andrews unit root test with structural break to compare the unit root result with the conventional ADF result while the Autoregressive Distributed Lag (ARDL) bounds testing approach is used to investigate the co-integration among the variables in the presence of structural breaks. Also the impulse response function (IRF) was employed to determine the response of Economic Growth to monetary policy shocks in Nigeria from 1981 to 2021. The unit root test shows that failure to account for structural break in unit root of a volatile series can produce wrong inference. After allowing for structural breaks, the study finds no evidence of co-integration relationship between economic growth and monetary policy. Thus it can be argued that there exists only a short run relationship between the variables of study. The estimates of the ARDL short run model suggest that Money Supply (M2) has a significant positive impact on economic growth in the short run at the selected lag length. However, the estimates show that Net Credit to Government (NCG) has a negative significant impact on economic growth in Nigeria. More also, Exchange Rate (EXR), Inflation (INFL) and Maximum Lending Rate (MLRC) have a positive but insignificant effect on Economic Growth in the short run. The Impulse response function (IRF) results suggested that Economic Growth responds negatively to money supply (M2) and Net credit to Government (NCG) shocks. More also the result shows that Economic growth respond positively to Exchange rate (EXR) shocks. Furthermore, the Impulse Response results show that Inflation (INFL) and Maximum Lending Rate (MLRC) possessed no impact on economic growth as their shocks quickly dies or converges back to zero. Therefore this study makes the following recommendations for policy makers and future researchers in Nigeria: the policy makers in Nigeria should increase the level of broad money supply in the country since broad money supply lead to economic growth in the short run. Also the Apex bank in Nigeria should embark on the use of appropriate monetary policy variables that will address non-performance of Exchange rate and maximum lending rate in contributing to the nation’s economic growth.
TABLE
OF CONTENT
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
Table of Content vii
List of Tables viii
List of Figures ix
Abstract x
CHAPTER 1: INTRODUCTION
1.1 Background
of Study 3
1.2 Statement
of Problem 4
1.3 Objective
of the Study 5
1.4 Significance
of the Study 5
1.5 Scope
of the Study 6
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1 Conceptual
Review 9
2.2 Theoretical
Frame Work 12
2.3 Empirical
Literature 18
CHAPTER 3: MATERIALS AND METHODS
3.1 Sources of
Data and Period of Study 19
3.2 Research
Methods Used for the Analysis 35
CHAPTER 4: RESULTS AND DISCUSSION
4.1 Descriptive
Statistics 38
4.2 Testing for
Unit Roots and Structural Breaks 41
4.3 Autoregressive
distributed Lag (ARDL) model estimation 47
4.4 Impulse
Response Function (IRF) estimation 49
4.5 Diagnostic
Test 52
4.6 Stability Test 53
CHAPTER
5: CONCLUSION AND RECOMMENDATIONS
5.1 Conclusion 55
5.2 Recommendation 56
References 59
Appendices 68
LIST OF TABLES
4.1
Main Descriptive Statistics Result 36
4.2.1
Result of ADF Unit Root Test 40
4.2.2
Result of Zivot Andrews Unit Root Test 40
4.3.1
Result of ARDL Bound Test 43
4.3.2
ARDL Econometric Model 44
4.3.3
Result of Wald Test 46
4.5
ARDL Residual Diagnostic Result 50
LIST OF FIGURES
4.1
Series plot of variables at level 37
4.2
Series plot of variables at first difference 38
4.3
Model Selection Summary Graph 44
4.4
Impulse Response function 48
4.5
CUSUM Stability Test of ARDL(5,5,1,0,2,0) 53
4.6
CUSUM Stability Test of ARDL(5,5,1,0,2,0,0) 53
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND OF STUDY
Monetary
policy is a deliberate action taken by the monetary authority to affect the
amount, cost, and accessibility of money credit in order to attain the desired
macroeconomic goals of internal and external balances (CBN, 2011). To control
the amount of money in the economy, the activity is carried out by altering the
money supply and/or interest rates. Thus, nations have sought to use monetary
policy as a tool for managing the economy in order to achieve long-term
economic growth and development. Adams Smith was the first to formally
articulate this relationship between money and economic aggregates, and
monetary economists later championed it. Because of the explanations of how
monetary policy affects macroeconomic goals like economic growth, price stability,
balance of payments equilibrium, and a host of other goals, monetary
authorities are now charged with utilizing monetary policy to expand their
economies.
The expansion of products and services in a nation at
a specific point in time is referred to as economic growth. This naturally
shows that economic growth occurs when a nation's actual per capita income
rises over time. A rising economy generates commodities and services across
successive time periods, indicating a rise in the economy's production potential.
In general, economic growth entails a rise in average living standards and a
decrease in income distribution disparities (Jhingan, 2004).
Since the Central Bank of Nigeria was given the duty
of creating and carrying out monetary policy by the Central Bank Act of 1958,
monetary policy has been utilized in Nigeria. Treasury bills, a financial
instrument used for open market operations and raising debt for the government,
have grown in volume and value as a result of this role, becoming a significant
earning asset for investors and a source of market-balancing liquidity.
Monetary policy in Nigeria has been primarily
characterized by the post-1986 and pre-1986 periods. Prior to 1986, Nigeria
maintained direct monetary management to maintain price stability; however,
after the market was liberalized in 1986, the focus moved to market mechanisms
(Uchendu, 2009). In order to fight inflation and maintain price stability prior
to 1986, direct monetary instruments were used, such as selective credit
controls, administered interest and exchange rates, credit ceilings, cash
reserve requirements, and special deposits. Interest rates were set at
relatively low levels primarily to encourage investment and economic growth.
Occasionally, special deposits were enforced to limit the banks' ability to
provide credit and their excess reserves (Uchendu, 2009; Okafor, 2009).
Given that the implementation of the monetary
management system grew less successful with time, it appears that during the
aforementioned period, the monetary targets were not met. The unfavorable effect
of limiting the growth of money and capital markets may have been greatly
exacerbated by the rigorously managed interest rate regime and the lack of
coordination between fiscal and monetary policies. Instead of relying on a
direct control mechanism for monetary policy during the Structural Adjustment
Programme (SAP) era, market-oriented reform was adopted for successful
mobilization of savings and efficient resource allocation. The market-based
framework's primary tool was open market operations.
In recent years, Nigeria's monetary policy has been
built on a framework with a medium-term vision. The change was made to reduce
overreaction to transient shocks and liberate monetary policy implementation
from the issue of time inconsistency. To influence interbank rates and
subsequently other market rates in the desired direction, policies have ranged
from focusing on monetary aggregates to monitoring and altering policy rates
(Okoro, 2018; Uchendu, 2009). Policymakers and researchers are extremely
concerned about how much these policies have contributed to economic
stabilization and growth.
In Nigeria, there have been numerous monetary policy
regimes. Monetary policy, which is primarily employed to stabilize prices, can
be lax or tight at different times. The economy has had periods of expansion
and contraction, but it is clear that the growth that has been reported has not
been sustainable given that there are signs of rising poverty in the
population. The question is, can sound monetary policy be credited with the
current expansion? And could causes other than weak monetary policy be held
responsible for periods of economic downturn? What measures need to be
considered if monetary policy is to be effective in bringing about sustainable
economic growth and development? These are the concerns that remain unsolved in
Nigeria, which this study would aim to answer.
1.2 STATEMENT OF PROBLEM
Despite the efforts made by the Central
Bank of Nigeria (CBN) through the implementation of monetary policy measures,
the Nigerian economy continues to experience a myriad of issues that are
related to the amount of money in circulation. This is so because the amount of
money in the economy dictates its economic stability and, consequently, whether
or not economic growth is increasing or decreasing. Lowered price levels are
thought to be connected with long-term, sustainable growth, according to theory
and actual data in the literature. In other words, sustained economic growth
and wellbeing are harmed by rising inflation. Financial circumstances in the
economy are greatly influenced by monetary policy, not just in terms of costs
but also in terms of loan availability, banks' willingness to take certain
risks, etc. The prices of goods, the value of assets, currency rates, as well
as consumption and investment are all impacted by expectations about the future
course of the economy and inflation.
However, there is conflicting evidence in
both theoretical and empirical literature about the effect of monetary policy
on economic growth in Nigeria and elsewhere. While some studies contend that
monetary policy has a favorable and considerable impact on economic growth,
others hold the opposite view. According to studies like those by Ajibola and
Oluwole (2018), Lacker (2014), Lashkary and Kashani (2011), monetary policy's
expansion of the money supply has a negative impact on economic growth through
inflation.
While studies such as those by Anowor and Okorie
(2016), Chipote and Makhetha-Kosi (2014), and Fasanya and Onakoya (2013)
concluded that monetary policy has a positive and statistically significant
impact on economic growth, these empirical literature outcomes demonstrate
inconclusiveness. Therefore, there is a need to identify the actual influence
monetary policy tools have on economic growth in Nigeria across the periods
stretching from 1981 to 2021.
1.3 AIM AND
OBJECTIVE OF THE STUDY
The
aim of the study is to evaluate the long-run and short-run causation between
monetary policy variables and economic growth as measured by real gross
domestic product (RGDP).
The specific objectives are:
1. To
investigate whether there is stability or a break in the mean level of the
variables over the periods under review.
2. To investigate the long-run relationship between Monetary
Policy Variables and Economic Growth.
4. To
identify the short-run relationship between Monetary Policy variables and
Economic Growth
5. To
trace out the responsiveness of Economic Growth to the shocks of each monetary
policy variables in the system
1.4 SIGNIFICANCE OF THE
STUDY
This research work is significant in many ways:
Firstly, it would help in
determining actual and potential impact of the monetary policy on the economic growth
process of the country;
More importantly, it will be of immense importance to policymakers
at the Central Bank of Nigeria who issue guidelines governing foreign trade
practices and will be of specific importance to employers and employees,
importers and exporters, industry and trade officials, politicians, academics,
and the general public as well.
Finally, scholars who will find the thesis interesting and who want
to conduct their research in this area are welcome to utilize this work as a
source of inspiration for their own.
1.5 SCOPE OF THE STUDY
This
research work is limited to monetary policy indicators and the economic growth
of Nigeria. Quarterly secondary time series data on economic growth proxied by
Gross Domestic Product (GDP), Broad Money Supply (M2), Exchange Rate (EXR),
Inflation Rate (INF), Maximum Lending Rate of Commercial Banks (MLRC), and Net
Credit to the Government Sector (NCG) for a period of 40 years from 1981 to
2021 was collected.
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