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Is Monetary Policy a Growth Stimulant in Nigeria? A Vector Autoregressive Approach

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  • Adesoye, A. Bolaji
  • Maku, Olukayode E.
  • Atanda, Akinwande AbdulMaliq

Abstract

This paper critically examines the dynamic interaction between monetary policy tools in stimulating economic growth, as well as stabilizing the economy from external shocks in Nigeria. The paper considered key monetary time series variables and real growth of output in formulating Vector Autoregressive (VAR) models which showed interdependence interaction between the period of 1970 and 2007. The time series properties of the selected variables are examined using the Augmented Dickey-Fuller unit root test and the results revealed that only growth of real output and broad money supply are stationary at levels, while saving, lending and exchange rates were found stationary at first difference. The long-run dynamic interaction was established through the Johansen’s Trace and Maximum Eigenvalue tests. The pair-wise Granger-Causality test conducted showed that the growth rate of real output is not a leading indicator for any monetary variables. Other innovation accounting tests were also carried out like impulse responses function to test for the response of growth in real output to innovation shock on monetary variables. Also, the forecast error variance decomposition (FEVD) is used to decompose the monetary shock on the growth rate of real output in Nigeria. Proper policy recommendations were proffered based on the results emanated from the econometric analyses.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35844.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:35844

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Keywords: Monetary policy; Monetary Instruments; Economic growth; VAR; Impulse shock response; Variance decomposition;

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  1. Rafiq, M.S. & Mallick, S.K., 2008. "The effect of monetary policy on output in EMU3: A sign restriction approach," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1756-1791, December.
  2. Jon Faust & John H. Rogers, 1999. "Monetary policy's role in exchange rate behavior," International Finance Discussion Papers 652, Board of Governors of the Federal Reserve System (U.S.).
  3. Spencer Dale & Andrew Haldane, 1993. "Interest rates and the channels of monetary transmission: some sectoral estimates," Bank of England working papers 18, Bank of England.
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