THE IMPACT OF MONETARY POLICY ON THE NIGERIAN ECONOMY

ABSTRACT

This study was carried out to investigate and establish empirically the impact of monetary policy on the Nigerian economy between 1986 and 2013. The relevance of this study was to provide econometric framework that will facilitate an objective assessment of the effectiveness of monetary policy in Nigeria and to assist policy makers and analysts on the way to establish price stability using monetary policy. To achieve the objective, two hypotheses were constructed, one using inflation (INFL) as dependent variable and the other using real output (RPUT) as dependent variable. To achieve the objective of the research, a stationarity test was carried out using Augmented Dickey Fuller (ADF) and the Philip Peron (PP) statistic. Also carried out was co-integration test, test of correlogram and a test on Error Correction Model (ECM). The results revealed that approximately 69 percent of the total variations in the inflation is caused by money supply (MOS), Interest rate (INTR) and Import Prices (IMPT), while 62% of variations in the real output in the second model is caused by money supply (MOS), Interest rate (INTR), inflation (INFL) and Import Prices (IMPT). The current and the lagged values of money supply (MOS) in model one are positively signed indicating that money supply (MOS) impacts positively on inflation while in model two only the lagged value money supply (MOS)is positively signed. However, real output (RPUT) in its current and lagged values has negative impact on inflation. The policy implication of these findings is that monetary policy as a tool for measuring prices stability shows a consistent result. Hence, it is a reliable tool to combat inflation in Nigeria. It is recommended that Central Bank of Nigeria (CBN) should adopt a mix of monetary and commercial policies in establishing and promoting economic growth in Nigeria.