The Effects Of Monetary Policy On Economic Growth,Price Stability And Balance Of Payments

The understanding of monetary policy effect on Nigeria economy is very important for the growth and development of the country going forwards.The study empirically evaluate impact of monetary policy on the economy,particularly how it impact growth prospect of Nigeria,effectiveness in curbing inflationary pressure and influence on balance of payment,also test validity of rational expectation hypothesis in Nigeria,determine long run relationship,in addition evaluate forecast performance of inflation targeting policy.The analyses presented here are meant to generate stylized fact,stimulates new ideas and statistical testing of econometrics model.The study contributes in following ways;the inclusion of all monetary policy instruments used in conduct of monetary policy hitherto not considered in previous studies.Ascertain effect of monetary policy on balance of payment in Nigeria and empirically investigates monetary policy effect on three of its objectives at once.The econometric method of Autoregressive distributed lag(ADL)method,enable us capture dynamic impact(short run)and long run impact on the objective variables and short run causality allowed for tracing historical impact.Not only that,the study applied asymmetry lag method to determine lags of each variable included in each model,thereby alleviate endogeneity problem and over parameterization of models,that characterized traditional method of symmetry lags usually applied on autoregressive analysis and also examined impacts of policy changes during structural adjustment program of 1986 and inflation targeting adopted in 2006,to ascertain their effect on Nigeria economy.The study covered annual data spanning the period 1970 to 2015.Autoregressive distributed lags(ARDL)methodology was employed to estimate co-integration relationship among economic growth,inflation,balance of payment and monetary policy variables,long run,ARDL short run model and ARDL causality tests were estimated.The lag lengths were determined based on information criteria using Akaike information criteria(AIC),Schwarz information criteria(SIC),Hannan-Quinn criteria(HQC)and Adjusted R-squared(AR)for determination of appropriate lags for each variable used in ARDL co-integration bound test,ARDL short run models and short run causality test in the three models of the study.The co-integration relationship shows economic growth,inflation rate,balance of payment and monetary policy instruments(exchange rate,money supply,cash reserve ratio,money policyrate,Treasury bill)were co-integrated,long run relationship exist amongst these variables in the three models.Anticipated policy have strong significant impact on the economy while unanticipated policy have insignificant impact on the economy,therefore,rational expectation hypothesis does not hold in Nigeria.Exchange rate,money policy rates(MPR)and cash reserve ratios have negative significant effect on economic growth consistent with a priori expectation.Money supply(M2)have positive statistical significant effect on economic growth,consistent with a priori expectation and theory,quantity base policy have more impact on the economy than price base policy approached while exchange rate,monetary policy rate and cash reserve ratio are impediment to economic growth of Nigeria in long run.Policy change have significantly impacted economic growth,structural adjustment programs of 1986 have negative impact on economic growth while inflation targeting have positive effect on economic growth,hence,the recent CBN policy switch is a right step in right direction and more effort aims at strengthening implementation strategy should be enhanced.The error correction term is negative significant at 5 percent consistent with expectation,reinforcing co-integrating relationship,the adjustment process towards equilibrium is slow,for any disequilibrium from long run path in short run 16 percent of disequilibrium are corrected each year.First lag economic growth(GDP),cash reserve ratio,change in exchange rate and first to third lags of exchange rate have positive significant effect on economic growth and exchange rate have lagged effect on economic growth in Nigeria.This contrast long run result where exchange rate have negative significant effect on economic growth in long run,change in money supply and first lag of money supply have negative significant impact on economic growth,excessive supply of currency in circulation in the short run might lead to spiraling inflation which in turn retard economic growth in short run.Monetary policy rate have lag effect on economic growth,implied a policy undertaken today will required one period lag for it to have effect on the economy.And exchange rate and money supply cause economic growth in short run while cash reserve ratio and monetary policy rate does not cause economic growth in short run and CUSUM and CUSUMsq showed both long and short run model are stable.Money supply(M2)and money policy rate(MPR)have positive significant impact on inflation;there is evidence of interest rate puzzle while economic growth(GDP),exchange rate and cash reserve ratio have inverse(negative)significant impact on inflation rate.An effective and efficient price stability policy in Nigeria should aim at enhancing economic growth andexchange rate stabilization and CBN nominal policy anchored rate is not effective tool for price stability in long run.The error correction term has expected sign and significant,for any disequilibrium from long run path in short run,31 percent of the disequilibrium is corrected each year.First lag of inflation accentuate inflationary pressure and money supply(M2),exchange rate,second lag and cash reserve ratio have positive significant impact on inflation,however cash reserve ratio is not consistent with expectation.Monetary policy rate(MPR)the anchored policy rate have negative significant impact on inflation rate,nominal anchored policy instrument of CBN is effective instrument in curbing inflationary pressure in short run and lags GDP have negative significant impact on inflation rate,consistent with a priori expectation.Growth prioritize policy is the panacea for combating inflation.Exchange rate,money supply and Treasury bill cause inflation rate while cash reserve ratio and monetary policy rate does not cause inflation in short run,the CUSUM and CUSUM squares test graphs shows long and short run coefficient are stable.Money supply(M2),monetary policy rate(MPR),and economic growth(GDP)have positive significant effect on balance of payment,consistent with a priori expectation while inflation rate is not significant.It remarkable with GDP having highest impact on balance of payment,reinforcing the fact that Nigeria can attain favorable balance of payment when domestic production are enhance and encourage on sustainable basis.Exchange rate have negative significant effect on balance of payment,not consistent with a priori expectation and economics theory,the peculiar structured of Nigeria economic being import dependent,exchange rate depreciation exert negative effect on balance of payment,because we do not produce and export to take advantage of currency depreciation to enhance international competitiveness and cash reserve ratio is insignificant.The error correction term is correctly sign and statistically significant,for any deviation from the long run equilibrium in short run 24 percent of deviation from long run is corrected each year.Balance of payment has positive significant impact on current balance of payment position,consistent with expectation that a favorable balance of payment in the past will improve on current payment position.Monetary policy rate,exchange rate and first lag of economic growth(GDP)have positive significant impact on balance of payment;consistent with a priori expectation;spurring growth is the panacea for favorable balance of payment in Nigeria.Inflation has immediate positive effect on balance of payment and cash reserves haveimmediate inverse significant impact on balance of payment but coefficient is low and negligible in empirical work.Exchange rate,cash reserve ratio and inflation rate cause balance of payment in short run while money supply,monetary policy rate and economic growth does not cause balance of payment in short run.The long and short run model coefficients are stable.This study recommend thus:(i)the result obtained from analysis shows that quantitative policy instrument is most effective in spurring economic growth and curbing inflation in Nigeria.Hence,recommend that monetary policy maker?s(CBN)should give greater role to quantitative tool(broad money)than price base tools in policy implementation in Nigeria(ii)monetary policy has long run relationship with economic growth,inflation and balance of payment in Nigeria,monetary policy be implemented holistically,as ignoring other aspect could spell doom to the ultimate objective set out by the authority in long run horizon.Owing to the fact that speed of convergence to long run path is slow,it means things might have gone bad before action would be taken(iii)the study found policy switch to inflation targeting policy has positive impact on economic growth and consistent with objective of inflation targeting framework in Nigeria,inflation targeting policy approached should be strengthen and forecasting tool of monetary policy should be overhaul,new methodology and process put in place to provide better forecast in future to narrow the gap between forecast and outcome(iv)having found monetary policy effect on the economy differs between long and short term horizon,policy should be formulated with understanding that impact differs between time horizon and allowance be made for impact to take effect before adjustment are made in short run policy implementation framework.Exchange rate policy,cash reserve ratio and inflation policy be fine tune and implemented in both short and long run horizon to better adapt to prevailing circumstance in order to attain better policy outcome(v)economic growth found to be the most effective way to tackle inflation(price stability)and balance of payment problem in Nigeria.Hence policy aim at spurring economic growth should be the centre pace for price stability policy and attainment of favorable balance of payment.Economic growth should be pursue on sustainable path and import substitute policy adopted in medium term in order to cut down import bill,and CBN take active role in growth enhancing policy to increase domestic production,thereby creating more job opportunities in Nigeria.