Economic Growth and Monetary Policy Transmission Mechanism: An Empirical Assessment of Nigeria

Abstract

This work investigates the monetary policy transmission mechanisms and their efficacy in predicting economic growth in Nigeria using the ARDL methodology. Variables included in the model were growth rate of real domestic gross product (RGDP), M2 broad money supply definition, cash reserve ratio (CRR), nominal exchange rate (EXCR); inflation rate (INFL), interest rate and deposit money banks credit to the private sector (BCR). The unit root test using the ADF test revealed that all our variables were integrated at levels I (0). The study proceeded to estimate the ARDL bounds tests; the ARDL long run estimations; the diagnostic tests, normality and stability tests respectively. The critical findings from our result and analysis revealed that broad money supply (M2), exchange rate (EXCR), cash reserve ratio (CRR) and the rate of inflation (INFL) were the major monetary policy transmission mechanism predicting the level of economic growth in Nigeria. Likewise, the study identified interest rate (INTR) and deposit money banks credit to the private sector (BCR) as weak transmission variables driving economic growth and prices in Nigeria. The study concludes that the monetary policy transmission mechanisms have had a mixed bag in predicting economic growth in Nigeria. This conclusion was arrived based on the fact that the findings suggest that the negative impacts outweigh the positives, especially, as the critical variables like interest rate, credit to the private sectors and exchange rate depreciation plays a key role in driving economic growth. The monetary authority should be religious in seeing through monetary policies, especially, in maintaining consistency. Devaluation or depreciation of the naira also is not pro-growth in Nigeria and should be jettisoned, pending the diversification of our economy and improvements in our domestic productive capacities. Evidently, access to private sector credit at a lower interest should be pursued vigorously.

Keywords: monetary policy, transmission mechanism, economic growth and devaluation

DOI: 10.7176/RJFA/10-18-06

Publication date:September 30^th 2019