Monetary Policy and Macroeconomic Stability in Nigeria: Evidence from Error Corection Model

Abstract

Monetary and fiscal policies seek to achieve relative macroeconomic stability. Based on experiences on the role of monetary policy in controlling economics instability, this study examines the extent to which the above objective has been achieved in the Nigerian economy. Employing the error correction methodology and using data spanning over 1970 to 2010 and found that monetary policy has played positive and significant role in stabilizing the Nigerian economy by raising aggregate output. This finding was however contrasted as exchange rate policy has not been effective since it has impacted significantly negative on the economy. Moreover, money supply, exchange rate and minimum rediscount variables had positive and significant effects on consumer price index, implying that they have together fueled inflation in the economy. It is therefore suggested that government through the relevant agencies should fine tune the monetary policy as it affects supply of money to the economy, credit to banks and exchange rate regime (while keeping its eye on other complementary policies) so that they can have better stabilizing effects on the Nigerian economy.

Keywords: Monetary policy, Inflation, Output, Investment and Employment