Effects of Monetary Policy on Output Growth and Inflation in Nigeria, 1986– 2020

Abstract

This study assessed the effects of monetary policy on output growth and inflation rate between 1986 and 2020 in Nigeria. The study employed theoretical perspective of Keynesian Reformulated Quantity Theory of Money. Time series data on Monetary Policy Rate (MPR), Money Supply (M2) and Gross Fixed Capital Formation were obtained. The data were analysed using the Vector Error Correction Models. The study found that while monetary policy tools such as MPR and M2 have insignificant impact on inflation in the long run, their impacts were significant on real output growth. This suggests that inflationary pressure in Nigeria is not monetary driven in the long run. In terms of the short run, the study found that real output growth responds negatively to inflation rate, but positively to M2 and Monetary Policy Rate (MPR). Other findings from the study include (i) expansionary monetary policy characterised by lowering MPR and rising M2, fuels inflation in the short run, and this hurts real output growth, and (ii) MPR is driven by the lag values of real output growth, inflation rate, and money supply. For an effective monetary policy, the study suggests that efforts should be geared towards expanding financial inclusion and investment in Nigeria. The study also suggests the need for proper management of macroeconomic environment so as to stabilize inflation given that unstable macroeconomic environment also impacts negatively on real output growth.