Money Growth Bias and Output Variability in Nigeria: An Empirical Perspective

Abstract

The application of the Kydland-Prescott and Barro-Gordon framework on money growth bias and economic growth proxied with output growth focuses on monetary authorities’ desire to stimulate output above its natural growth rate. This paper shows that output stabilization target by the monetary authority often generates money growth bias in Nigeria. However, maintaining stable domestic price around the public expectation increases output above the full employment but at the cost of high output volatility. This is in line with Rogoff (1985) proposition on delegation approach as a solution to dynamic inconsistency problem. The paper adopts Autoregressive Distributed Lag (ARDL), Autoregressive Moving Average (ARMA), Generalized Autoregressive Conditional Heteroscedasticity GARCH (1, 1) and the threshold GARCH (1, 1) modeling framework as well as Cointegration Analysis (Bound testing and Johansen-Juseluis procedure). The annual data used in the estimations were sourced from the Central Bank of Nigeria (1970 - 2010).

Keywords: money growth bias, output growth, money growth expectation, co-integration, unit roots test, autoregressive distributed lag model, autoregressive moving average model and bound testing.