Empirical Analysis of Monetary and Fiscal Policies and Balance of Trade Dynamics in Nigeria (1981- 2017)

Abstract

This paper empirically investigated the relationships among money supply, government revenue, government expenditure, domestic debt, external debt, inflation rate, exchange rate and balance of trade in Nigeria based on time series data which spanned between 1981 and 2017. The data were sourced from Central Bank of Nigeria Statistical Bulletin publications of various issues and National Bureau of Statistics. The data were tested for stationarity using Augumented Dickey Fuller unit root test and Phillips-Perron unit root test while the co-integration test was conducted using Johansen’s methodology. Ordinary Least Square (OLS) estimating technique was used for the empirical analysis. The findings revealed that both the explanatory variables and the dependent variable have long run equilibrium relationship. The results further demonstrated that government revenue (GREV), government expenditure (GEXP), exchange rate (EXGR) and inflation rate (INFR) have statistically significant positive relationships with balance of trade (BOT) while money supply (MS), domestic debt (DDEBT) and external debt (EDEBT) exert statistically significant negative impact on balance of trade (BOT) in Nigeria. Based on the results, government at all levels should ensure implementation of monetary and fiscal policies’ instruments aimed at promoting favorable investment atmosphere through appropriate stabilization of interest rates, exchange rates and inflation rates in order to galvanize economic growth, economic stability, economic sustainability and favorable balance of trade; there should be promotion of exportation of Nigerian products by the government especially non-oil products in order to bring more foreign exchange earning into the country, boost productive activities and improve the balance of trade position of the country. In addition, government should ensure that loans borrowed from domestic and external sources are judiciously expended on productive activities in order to positively influence balance of trade; and there should be imposition of ban on importation of products that can be manufactured domestically so as to expand productive capacity of indigenous industries and ensure favorable balance of trade. Finally, different tiers of government should invest massively on critical infrastructure in the economy to boost local investment in productive activities, thus galvanizing balance of trade.

Keywords: Monetary Policy, Fiscal Policy, Balance of Trade, Unit Root Test, Co-integration Test, Ordinary Least Squares, Nigeria

DOI: 10.7176/JPID/50-07

Publication date:June 30^th 2019