Monetary Policy in Nigeria – The Impact of Monetary Policy on Nigeria’s Economic Growth

Monetary Policy in Nigeria – The Impact of Monetary Policy on Nigeria’s Economic Growth

Monetary Policy in Nigeria – Developing countries growth policies are better delivered as full packages since fiscal and monetary policies are inextricable, except in terms of the instruments and implementing authorities. However, monetary policy appears more potent in  correcting short term macroeconomic maladjustments because of the frequency in applying and altering the policy tools,

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relative ease of its decision process and the sheer nature of the sector which propagates its effect to the real economy – the financial system.

The main objective of monetary policy in Nigeria is to ensure price and monetary stability. This is mainly achieved by causing savers to avail investors of surplus funds for investment through appropriate interest rate structures; stemming wide fluctuations in the exchange rate of the naira: proper supervision of banks and related institutions to ensure financial sector soundness; maintenance efficient payments system; applying deliberate polices to expand the scope of the financial system so that interior economics, which a re largely informal, are financially included. Financial inclusion is

Particularly important in the sense that the larger it is larger is the interest rate sensitivity of production and aggregate demand and so the more effective monetary policy is.

The economy of Nigeria is faced with unemployment low investment and high inflation rate and these factors mitigate against the growth of the economy. Thus adopting monetary policy in manipulating the fluctuations experienced so far in the economy, CBN undertakes both concretionary and expansionary measures in tackling the problems observed above. Therefore, the need is felt to research on the impact of monetary policy on the economic growth of Nigeria. Thus, the following research questions sharpen the focus of the problem.

  • Does monetary policy have any significant impact on Nigeria’s economic growth?
  • Is there any long-run relationship between monetary policy and economic growth in Nigeria?

The general objective of this study is to examine the impact of monetary policy on Nigeria ‘s economic growth.

The specific objectives include:

  • To determine the effect of monetary policy on the Nigerian economic  growth
  • To ascertain the long- run relationship between monetary policy and economic growth in Nigeria.


1. Ho: Monetary Policy does not have significant impact on Nigeria’s economy.

2. Ho: There is no long-run relationship between monetary policy and economic in Nigeria.


As the Central Bank of Nigeria is undertaking policies that will promote the economic growth of Nigeria , this study will act as a source of information on various ways of adopting monetary policy and its instruments for stabilizing the economy. It will guide the policy makers towards policy initiation.

It will help students and researcher to do further work related to this research project.


The study covers the impact of monetary policy on Nigeria ‘s economic growth in the period 1970 to 2009. In the course of the analysis, effects shall the period under review.


Social sciences concepts have received avalanche of definitions, and as such, on one definition has all it takes for universal acceptability.  However, the following concepts, as defined below, are relevant to the study.

i . Effects are the result or an out come of something.

Ii. Money in an policy is a measure designed to regulate money in an economy ( Erb 1995).

Iii  money  supply refers to the stock of liquid assets held within an economy at a point in time ( Tirwall 1974).

iv. Inflation means a sustained rise in the average price of a standard basket of goods and services, without a corresponding increase in the quantity of those goods and services (Oyejidi 1972).

v. Gross domestic product ( GDP) is the market value of final domestic production of goods service during a given period, usually Year.



Monetary theory has undergone a vast and complex evolution  since the study of the economic phenomenon first came into limelight, It has drawn the attention of   many researches with different views on the role and dimensions of money in attaining macro- economic objectives. Consequently, there are quite a number of studies aimed at establishing relationship between the  stock of money and other economic aggregates such as inflation and output.

In this chapter we will take a look at the different schools  of  thought, their views of the role of money in attaining policy objectives alongside are view the necessary literature relating to this study.


The classical school evolved through concerted efforts and contribution of economists like Jean Baptist Say, Adam  Smith, david Richardo, Pigu and others who shared the same beliefs . The classical  model attempts to explain the  determination, savings and investment with respect to money.

The classical model on say’s law markets which states that ‘’ supply creates its own demand. ‘ Thus classical economists believe that the economy automatically tends towards full employment level by laying emphasis on price level and on how best to eliminate inflation (Amacher and  UIbrich, 1986)

The classical economists decided upon the quantity. Theory of money as the determinant of the general price level. Theory shows how money affects the economy. It may be considered in terms of the ‘’ quation of Exchang’’. This equation 2.1

Implying that changes in the price level can be changes in the stcok of money.  . The equation  of exchange can be startsd thus:


Mv= py  2.1

Mv = py

Where py = Gnp

Mv= Total Expenditure= GNP

M= stock of money

P= General price  level

V= Income Velocity of money

Y =The Flow of Real goods and services

MV= measures the  total value of transactions t within a given period of time (total expenditure PY measures the value of goods currently produced and sold ( total product in value GNP). The relationship is derived from the fact that ina closed economy, anything a single  purchased by one person is  simultaneously sold by another ( two parts of with money equals the average stock of money in existence (m) goods and services ( velocity v).


The classical economists did not introduce the role of money in their model in terms of its demand and supply. Insteady introduced money by using the quantity theory. In short, related the level of economic commodity price  to the quantity of money in the economy and the level of its commodity production. Two very similar ‘’quantity theory’’  formulations were used to explain the level of price  VIz ; the transactions formulation or the Cambridge equation.

In the transaction version – associated with Fisher and Newcomb, some assumptions were made, Viz : that the quantity of money (m) is determined independently of other variable, velocity of circulation (V) is taken as constant, the volume of transactions (T) is  also considered constant. Thus of price (p) and the assumption of full employment of the  economy, the equation of exchange is given as;

MV   = PT, which can readily establish the production that – the level of price is a function  of the supply of money . That is, p= F(m) which implies that, any change in price. In cash balances version – associated with Walras, Marshell, Wicksell and  pigou, the neoclassical school)(Cambridge school), changed the focus of the quantity theory of without changing its underlying assumptions. This  version , focuses on the fraction (K) of income, held as money balances. The Cambridge version can be  expressed as:

M= kpy


K= Fraction of income

M =Quantity of money

P= price  level

Y=value of goods and  services

The K in the Cambridge equation is merely  inversion of V, the income Velocity of money balances, in the original formulation of quantity theory. This version directs attention to the determinants of demand for money,  rather than the effects of changes in the supply money .’ Anyanwu (1993).


The Keynesian model assumes a close economy and a perfect competitive market with fairly price- interest aggregate supply function. The economy is also assumed not to exist at employment equilibrium and also that it works only in the short run because asKey nes aptly puts it ‘’ In the long run, we also will be dead’’. In this analysis too, money supply is said to be exogenously determined if wealth holderonly have one choice between  holding bouds. The Keyesian theory is rooted on one notion of price rigidity and possibility of an economy setting at a less than full employment level of  output, income and employment. The Keynesian macro economy brought into focus the issue of output rather than prices as being  responsible for changing  economic conditions.  In other records, they were  not interested in the quantity theory perse.

From the  Keynesian in the mechanism, monetary policy works  by influencing interest rate which influences investment decisions and consequently, output and income via the multiplies process (Amacher and Ulbrich, 1989).


The monetarist essential, quantity theorist who adopted Fisher’s equation of  exchange to illustrate their theory, as a theory of demand  for money and not a theory of output price and money  income  by making a functional relationship between the quantity of real balances demanded a limited number of Variable (Essia, 1997) .

Monetarists  like Friedman (1963) emphasized money supply as the key  factor affecting the wellbeing of the economy. Thus , in order to  promote steady of growth rate, the money supply should grow at a fixed rate, instead of being regulated  and altered by the monetary  authority (ies). Keyness on the other hand, maintained that monetary policy alone is ineffective in stimulating economic activity because it works through indirect interest rate  rate mechanism .

Friedman equally argued that since money supply is substitutive not just for bonds but also for many goods and services, changes in money supply will  therefore have both direct and  indirect effects on spending and investment respectively. Brunner and Meltzer modeled spending  the  demand for money will depend upon the relative rates of return available or different competing assets in which wealth can be.


The  modern approach is the restatement of the quantity theory in modern terms. It resulted in a new and more sophisticated  the quantity theory and in manner amenable to empirical test.

It view s velocity of circulation as a stable function of a limited number of key  variables. That is, velocity bears a stable and predictable relationship to a limited number of other variables, and determiners how much money people  will hold rather than motive for holding more and sees money as the main type of asset which yields a flow of services to its holders, according to the functions it performs  (Fried man 1956).


In determining the factors influencing money demand , Friedman casts it in function is as follows.

Md  = F(rb, re,P, 1/P .dp/dt  w, w, u )

Where :

R b=  Interest return or Yields on bonds

Re = Rate of return on equities

P= the price level

1/p . dp/dt = ratio of price change overtime w

W= ratio of non human wealth

W= wealth of the economic actor or  permanent income

U=  tastes and preferences.

Therefore , the demand for money according to this approach, is not a fixed quantum , but varies  in a predictable fashion with the return on bonds and equalities, the price level expectation, ratio of human on non human wealth , or permanent income and tastes and preferences.


Aaogu (1998) sees monetary policy as actions by monetary authorities to influence the national economic objectives by controlling or influencing the quantity and direction  of money supply, credit  and the cost of credit. This according to him is  aimed at ensuring adequate supply of money to support financial accommodation  for growth and development  programmes for sustainable growth and development on the one hand and , stabilizing various sectors of the  , economy for  sustainable growth and  development on the  other.

Monetary policy can  seen as  employing the central Bank’s control of the money supply as an instrument  for achieving the objectives of economy  policy (Johnson 1962 ). Similarly, from a synthesis of most of the literature and in the context of the Nigerian situation , Ubogu (1985) defines monetary policy as an attempt by the monetary authorities to the level aggregate economic  activities by  controlling the quantity and direction of money and  credit  availability . Vaish 9 1979)  is the view that the theoretical  roots monetary policy  go the way  of the quantity theory  money, which according to him , remains a central theme in the theory The quantity theory

State that a change in money supply , ceteris paribus , results in a proportional change in he price level . The controversies in monetary theory and policy have centered on what has come to be called the transmission mechanism , the channel by which money supply influences economic activity .In interest rate,  move to bring the demand for money into equally supply , the new level of interest rates in turn influences both consumption and interest spending hence the  of out put (Johnson , 1962 ). Changes in money supply are to be compatible with the rate of inflation, This change affect s the wealth  of the  public and therefore influences their spending plans  even without changes rates. The interest rate channel, in any fails to apply in countries where  interest  rates are not freely   variable but are fixed .Inrush cases, credit is allocated by  some non-price criteria,  hence availability  and costs  become the channel  of influence (Ubogu, 1985) . Economists, and mainly of the classical, school, argue that expectations of individuals and firms play  an important role in transmitted the effect of monetary policy  actions  while this debate  goes no, many hold the view that; the relative strength of the various channels of transmission of monetary policy is likely to very from country  to over time, depending on  institutional  arrangements and economic circumstances. It may also be the case that the time lags inherent in the various channels of transmission differ. Another area of debate  in monetary theory policy where differences remain relatively wide is the question of the efficacy of monetary policy in nominal changes. Here, the difference in views  range from that of the Keynesians who   argue that monetary policy could influence  real output , in both the short and long runs,  to the neo-classical who argue that no such  change in real output  is possible even in the short  run. The  monetarist is captured by an aggregate supply curve which is upward sloping  to a point represented by full employment , which is the natural rate and  vertical  thereafter. This shape of the  aggregated supply curve allows for inflation/output trade-off, `

In the short but not in the long run. The neo-classical aggregate supply curves, in contrast to both of these, are vertical at the full employment level, thereby precluding any inflation/output trade off even in the short run. An important point worth stressing from the policy point of view, is the empirical fact that a close relationship is found to exist between money supply and nominal income in all countries. It follows perhaps logically from this, that if production cannot adjust in the short run, due to whatever bottlenecks, monetary action is likely to cause changes in prices (Dornbusch and Fischer 2004).

As noted earlier, monetary policy refers to the combination of measures designed to regulate the value, supply a cost of money in an economy in consonance with the expected level of economic activity. One of the principal functions of the Central Bank of Nigeria (CBN) is to formulate and execute monetary policy to promote monetary stability and a sound financial system. The CBN carried out this responsibility on behalf of the federal government through a process outlined in the Central Bank of Nigeria decree 24, 1991 and the banks and other financial institution decree 25, 1991 as amended. In formulating and executing monetary policy, the governor of the CBN is required to make proposal to the president of the Federal Republic of Nigeria who has the power to accept or amend such proposals. Thereafter the CBN is obliged to implement the monetary policy approved by the president (CBN) 1996).

The CBN is also empowered by the two enabling laws, to direct the banks and other financial institutions to carry out certain duties in pursuit of the approved monetary policy. Usually, the monetary policy to be pursued is detailed out in the form of guidelines are generally operated within a fiscal year but the elements could be amended in the course of those particular years. Penalties are normally prescribed for non- compliance with specific provisions in the guidelines.

The aims of monetary policy are basically to control inflation maintain a health balance of payments position in order to safeguard the external value of the national currency and promote adequate and sustainable level of economic growth and development.


Asogu, (1998) defined monetary policy as a measure designed to influence the availability, cost and direction of money and credit in pursuit of specified economic goals. Monetary policy is art of the overall economic policy that regulates the level of money supply and credit in the economy in order to achieve some desired policy objective. By monetary policy objectives, we mean the ultimate objectives of macroeconomic policy. The objectives include:

The maintenance of price stability; maintenance of balance of payment equilibrium; attainment of high rate of employment; accelerating the pace of economic growth and development; exchange rate stability and the maintenance of Price Stability.

In the modern economy, the price level tends to be sticky if not rigid in the downward direction, so that the problem of price level stability has essentially been that of avoiding inflation. Inflation erodes the purchasing power of economic agents and introduces uncertainty and other vices. Price stability is therefore, necessary not only to remove these vices but also to restore confidence and maintain international competitiveness.

The Maintenance of Balance of Payments Equilibrium:

In the case of maintenance of balance of payments equilibrium, policy will be directed at influencing the components of the balance of payments- the current and the capital account in such a way that the balance of payments is always in  equilibrium. For instance, monetary policy affects the interest rate and high interest rates attract capital inflows and hence influence the balance of payments. Which this level of development and growth are attained depends upon the resource available to the country.

Exchange Rate Stability

Fluctuations that may cause further deterioration or undue appreciation that may lead to overvaluation in a country’s currency are checked. The Central Bank in its monetary measures, aims at maintaining adequate level of foreign exchange rate consistent with the allocative efficiency.


The techniques by which the stated objectives are pursued by the monetary authorities can be classified into two categories:- the Market Control Approach and the portfolio Control Approach. Market Control Approach:

This is an indirect or traditional approach of monetary control.

They include the manipulation of:-

The Open Market Operation and

The Central Bank’s Discount Rate.

Attainment of High Rate of Employment

In the real world situations, the level of employment that implies full employment is not obvious. Economists  define a situation of full employment as one where all people who wish to work at the going wage rate in the labour market will be employed. But it is not possible that all those seeking employment will be employment at one time. Even in the period of boom in a dynamic economy, some people will always be between jobs or seeking new employment. Thus, the monetary policy measures aim at attaining a high rate of employment that should proxy full employment. In other words, it aims at maintaining a low and stable level of unemployment, Anyanwu (2003).

Accelerating the pace of Economic Growth and Development

Monetary policy aims at promoting economic growth and development. Development may be measured by the level of income per heard, capital per head, savings per head, the percentage of unexploited resources amount of public goods, the extent to which the working class obtained education. While economic growth may be said to concern itself with the effect of investment on raising potential income and hence causes changes in the living standard of the people. The extent to which this level of development and growth are attained depends upon the resource available to the country.

Exchange Rate Stability

Fluctuations that may cause further deterioration or undue appreciation that may lead to overvaluation in a country’s currency are checked. The Central Bank in its monetary measures, aims at maintaining adequate level of foreign exchange rate consistent with the allocative efficiency.


The techniques by which the stated objective are pursued by the monetary authorities can be classified into two categories:- the Market Control Approach and the Portfolio Control Approach.

Market Control Approach:

This is an indirect or traditional approach of monetary control.

They include the manipulation of:-

The Open Market Operation and

The Central Bank’s Discount Rate.

Open Market Operations

Open market operation refer to the buying and selling of government and other approved securities by the Central Bank in the open market. The Central Bank goes to the public or ‘Open’ market for either long or short term government securities and buys or sells them depending on whether the aim is to create or destroy bank deposits. Increase in the bank deposit implies an increase in the money supply. Thus, if the Central Bank wants to reduce the volume of money in circulation because the economy is irking by inflation, it sells securities to be public for which the public pays by writing cheque favoring their deposit accounts. This will reduce the commercial bank’s balance with the Central Bank and hence their ability to create money. Conversely, in times of depression, the Central Bank buys securities thereby increasing the reserve base of the commercial  banks and hence their loanable funds.

The Central Bank’s Discount Rate

Central Bank’s discount rate measures the price changed by the Central Bank for financial assistance made available to the banking sector in the events of perceived shortages of liquidity, (Chowdhry, 1986). In other words, it is the rate of interest the Central Bank charges the commercial banks on founds lent to them against collateral. The term also applies to the Central Bank’s activity of discounting bills when commercial banks by discounting bills, such as, treasury bills, treasury certificates, commercial bills and promissory notes of short term duration at the Central Bank. The lending rates of the commercial banks’ are closely linked; discount rate induces a fall in commercial banks’ lending rate and vice versa. The manipulation of the discount rate helps to control the volume of money in circulation. For instance, if the economy experiences inflationary pressure, the Central Bank raise the discount rate thereby making it very costly for the commercial banks to obtain founds from her. Consequently, commercial banks, in turn increase their lending rate. The effect of the increase in commercial bank’s lending rate is to reduce the  demand for borrowing, as long as the demand is interest elastic. This will, in effect, cause investment to shrink, and employment, income and the general price level will all fall.

Portfolio Control Approach

Portfolio Control Approach is a direct or non- traditional approach of monetary control. It works through the instruments of portfolio constants, namely:

Reserve requirements

Special deposits with the Central Bank

Selective credit controls

Moral suasion

Direct Measures.

Reserve Requirements: Commercial banks are required to keep some reserves with the Central Bank. By increasing or decreasing the banks’ reserve requirement, the Central Bank affects the banks’ ability to lend. When banks are required to hold more liquid assets in reserve, fewer assets will be left for them to lend to the general public. On the other hand, a reduction in reserve requirement release assets held for this purpose for lending as loans and advances by the banks.

Special Deposits with the Central Bank: Special deposits with the Central Bank are additional deposits over and above the minimum legal reserve requirement that the commercial banks are made to deposit with the Central Bank. The mandatory special deposits are a major measure in reducing the deposits available for banks to lend to their customers. Though they appear on the asset side of the bank’s balance sheets, they cannot be used as part of any reserve base.

Selective Credit Control: This is a measure used by the Central Bank to control the flow of bank credits to different sectors of the economy. The Central Bank directs banks on the cost, volume and direction of credit to different sectors of the economy. The central Bank may instruct the bank sector to give more loans to the preferred sector of the economy- the productive sector while extending little or no credit to the less preferred sectors- the service or consumption sector of the economy. By the use of selective credit control, monetary policy influences the volume of money in circulation as well as the allocation of resources.

Moral Suasion: This involves the issuing of persuasive instructions to commercial banks to control the flow of their credits to the economy. The Central Bank issues these instructions in its periodic meetings especially at the Bankers’ Committee Meetings, Annual Dinner of the Chartered Institute of Bankers of Nigeria and on other occasions when it meets formally or informally with the heads of the banking community. Moral suasion is supposed to be an appeal soliciting for the banks’ voluntary compliance over some credit guidelines.

Direct Measures: The direct measures involves the use of interest rate ceilings, lending ceilings and qualitative lending guidelines. The Central Bank may decide to place a limit on the rate of interest and in such a situation the rate of interest cannot fluctuate beyond that limit. The lending ceilings when placed, will limit the amount of found period of time that could be lent to the public by the commercial bank.


Anyanwu (2003), emphasized that if an economy with financial regulation starts to observe a  fairly steady upward trend in the velocity of the monetary base M1 and M3 without a corresponding growth in the gross domestic product (GDP) the ultimate economic monetary policy would be in addition to informing the banks (moral suasion) of this view by way of consultations to increase the interest rate, raise the special reserve deposits ratio and thus force the bank to reduce their asset base. Because of the existence of controls, change in the reserve ratio have a direct impact on banks’ lending.

Under the tap system of selling government securities whereby the price (and not the quality) of these securities was fixed there was very little risk of capital losses. Although most nations apply market operations to affect their liquidity condition, they are not the primary  instrument of monetary policy. Indeed, it mounts pressure on the primary market, therefore, discouraging the development of the secondary market; impairing true portfolio adjustment is by holders of government debt as well as the government ability to conduct open market operations.


The system of regulatory measures constructed to protect investors and to maintain confidence in the stability of financial market and institutions failed to achieve the set objective as financial institutions devised other names of operations than their compliance to the regulatory body controls. As observed by Anyanwu (2003), the regulations had allowed the banks to emerge as highly profitable institution but with a declining market share and at a high cost to depositors. Several developments according to her, rendered the impact of regulations of financial institutions a weak tool. One of such developments is the upsurge of and increase variability in inflation. Inflation has the potentials of increasing the opportunity cost of holding moneys balances. Investors tend to prefer short dated claims over longer dated claims. Maturity controls imposed on the banks restricted their ability to meet this demand. The limited flexibility of banks in the face of high and variable inflation rates afforded an opportunity for non-bank financial intermediaries to expand consequently, money Market Corporation, building society and credit Unions, experience rapid growth. Other development is the progressive increase in the size of government budget deficits. The effect of this rapid growth places considered pressure on the existing methods for the sales of public securities.

Osuber (2006) had maintained that monetary authorities could switch to financial de-regulation to set in motion changes in both manner in which monetary policy is transmitted to the real economy and the stability and interest rate elasticity of the demand for money. Thus the introduction of tender system of selling government securities and the move to a floating exchange rate regime increasing the monetary authorities potential control over injections of liquidity into the domestic monetary system thus, enhancing their ability to use open market operations to influence domestic monetary condition.

Osuber (2006), pin-pointed that monetary policy in a deregulated financial system, strengthens the role of market force in determining operations, and the real economy through changes in interest rates. With greater competitions therefore, financial sector, changes in interest rate,  tend to spread quickly through the whole range of financial assets and liabilities. Specifically, in the deregulated financial environment, the value of deposit is determined by both demand and supply consequently, any tightening of monetary policy by the monetary authority will induce a rise in deposit rate resulting in an increase in the supply of deposits and offsetting to some extend the authorities effort to reduce the growth of money. Thus, financial institutions particularly banks are now better able to protect their deposit base and to sustain their lending than they had been in the regulated frame work in which the volume of deposit was primarily determined.

The demand for credit may also have become less sensitive to interest rate in the deregulated system. For example, increased use of floating interest rates and moral suasion and flexible loan packages may result in less discouragement to marginal borrowers as rate rises.


Consistent and stabilized monetary policy is usually a set of demand management measures intended to remove some macroeconomic imbalances, which if allowed to persist, could be inimical to long-term growth.

According to Anyanwu (2003), countries seeking for sustainable economic growth after a period of macroeconomic imbalances must first get stabilized. In Nigeria, monetary policy effectively implemented is a veritable tool for stable economic growth.

Efforts for sustainable growth began in Nigeria in the early 1980’s in response to the emergence and persistence of unstable macroeconomic developments. There was need to address basic elements of economic instability such as the expended government spending which resulted in large deficits. The instability variables that needed to be stabilized were:

Excessive government borrowing; rapid monetary expansion; inflation; chronic overvaluation of national currency; reduced export competitiveness; introduction of N200 and N500 currency notes; growth in real GDP which stood at 2.8 and 3.8 percent in 1999 and 2000 respectively; CBN adoption of Universal Banking (UB) in Nigeria end of 2000.


According to Anyanwu (2003) a number of variables or aggregates have tended to influence the monetary policy. These variables are:

Economic Stability: for the main thrust of monetary policy to be fully implementable, there should be macroeconomic stability otherwise a lot of distortions and lapses will make the targets unrealizable.

Financial Market Efficiency: A special ingredient for the monetary policy effectiveness is the money market segment.

Inflation: The scope or magnitude of the inflationary trends in the economy goes a long way to influence the monetary policy. With high inflation any, rate the price stability exchange rate stability and balance of payments position, will not be  fully realized.


A review of existing empirical studies indicated that – for middle income economies, monetary policy shocks have some modest effects on economic parameters.

Genev (2002) for example, using a structural vector Autoregressive (SVAR) approach, studied the effect of monetary shock in ten central and Eastern European (CEE) countries, found some indications that changes in the exchange rate affect out put. In the same spirit, Starr (2005) using SVAR model with orthogonaized identification, found little evidence of real effects of monetary policy in five common wealth of independent states (CIS) with notable exception that-changes in interest rate have a significant impact on output.

However, for developing country like Nigeria, the evidence is weak and full of puzzles”. For example, Balogun (2007) used simultaneous equation model to test the hypothesis of monetary effectiveness in Nigeria, and found that-rather than promoting growth, domestic monetary policy was a source of stagnation and persistent inflation. Again, Chuku (2009) using a structural Vector Autoregressive (SVAR) approach in measuring the effect of monetary innovations in Nigeria found that price based nominal anchors do not have a significant influence on real economic activity modestly.

The idiosyncratic evidence (inconsistent with theoretical expectations), returned from different investigations in different countries, is what economists usually referred to as “puzzle”. The three most common puzzles identified in the literature are: the liquidity puzzle, the price puzzle and the exchange rate puzzle. The liquidity puzzle is a finding that-increase in monetary aggregates is accompanied by an increase (rather than a decrease) in interest rate. While the price puzzle is the finding that contraction monetary policy through positive innovations in the interest rate seems to lead to an increase (rather than a decrease) in prices. Yet, the most common in open economics is the exchange rate puzzle , which is a finding that an increase in interest rate is associated with depreciation (rather than appreciation) of the local currency.

Intuitively, it is discovered that the causes of the above identified puzzles, are due to inability of the pervious researchers to specify their model correctly. For  example, Chukwu (2009) in measuring the effect of monetary policy innovations in Nigeria, did not include interest rate in his model, which is an important instrument for monetary policy.

Again, inability of the researchers to use the correct econometric method in their regression analysis. For example, Balogum (2007) in determining effectiveness of monetary policy in Nigeria, applied only simultaneous equation model, which did not give room to test for stationarity of data in order to avoid spurious result.

Therefore. It is with the view of annihilating these puzzles, that the researcher would apply unit root test and co-integration econometric model, in order to stationarize the data, and ascertain the long run relationship between monetary policy and economic growth in Nigeria.




This chapter focuses on the research method that will be adopted. Regression analysis based on the classical linear regression model, otherwise known as Ordinary Least Square (OLS) technique is chosen by the researcher. The researcher’s choice of technique is based not only on its computational simplicity but also as a result of its optimal properties such as linearity, unbiasedness, minimum variance, zero mean value of the random terms, etc (Gujarati 2004).


In this study, hypothesis has been stated with the view of examining the impact of monetary policy on Nigeria’s  economic growth. In capturing the study, these variables were used as proxy. Thus, the model is represented in a functional form. It is shown as below:

GDP = F (MS, INT, EXCH) ………….. 1.1


GDP = Real Gross Domestic Product

MS = Money Supply

INT = Interest rate

EXCH = Exchange rate

In a linear function, it is represented as follows,

GDP = b0  + b1 MS + b2 INT + b3 EXCH+ Ut …………….. 1.2


b0 = Constant term

b1 = Regression coefficient of MS

b2 =   Regression coefficient of INT

b3 = Regression coefficient of EXCH

Ut = Error Term



Year RGDP (N=Million) MS (=N=Million) INT Rate EXCH Rate
1970 11.76819 6. 501738 7 0.7143
1971 3.759941 16.61547 7 0.6955
1972 8.526815 25. 31896 7 0.6579
1973   199.806 54. 50246 7 0.6579
1974     70.68161 80. 30013 7 0.6299
1975       7.266672 39. 23182 6 0.6159
1976       8.144374 33. 76234 6 0.6265
1977     – 7 32195 1.096369 6 0.6466
1978       2. 518109 28.04118 7 0.606
1979       5. 338587 47.68304 7.5 0.5957
1980  550. 5322 7. 031126 7.5 0.5464
1981 -2.69796 11. 95357 7.75 0.61
1982 -7.0547 15. 39495 10.25 0.6729
1983 -1.09651 11.93011 10 0.7241
1984 9.518966 12.44159 12.5 0.7649
1985 2.45483 4.232502 9.25 0.8938
1986 -0.56556 22.91948 10.5 2.0206
1987 7.357725 34.98785 17.5 4.0179
1988 7.665243 935.3842 16.5 4.5367
1989 13. 01924 -85.408 26.8 7.3916
1990 -0.8114 27.43463 25.5 8.0378
1991 2.2557 47.52662 20.01 9. 9095
1992 1.277907 53.75794 29.8 17. 2984
1993 0.224609 34.49515 18.32 22. 0511
1994 2.162566 19.41172 21 21. 8861
1995 4.384391 16.17814 20.18 21. 8861
1996 2.81778 16.039 19.71 21. 8861
1997 2.936073 22.31778 13.54 21. 8861
1998 0.416031 33.12089 18.29 21. 8861
1999 5.443978 48.06769 21.32 92. 6934
2000 8.45 27.00465 17.98 102. 1052
2001 21.34746 21.55423 18.29 111. 9433
2002 10.23295 24.11369 24.85 120. 9702
2003 10.47949 14.02364 20.71 129. 3565
2004 6.511934 24.35329 19.18 133. 5004
2005 6.031021 43.09492 17.95 132. 147
2006 6.449833 44.23953 17.26 128. 6516
2007 6.407226 57.78557 16.94 125. 8606
2008 6.296026 48.38334 15.94 118.8606
2009 -100 -100 16.7 124.4484



Currently modern economic analysis involve the use of econometric method where appropriate statistical and econometric test can be conduced to ensure the validity and reliability of the data and result, for accurate projection and prediction of the phenomenon in question. The multiple equation model is presented by the real Gross Domestic product (GDP) at current factor cost as the dependent variable, with the total function of Money supply (MS), Interest rate (INT) and Exchange rate (EXCH), as the explanatory variable. The model being a time series regression estimates, the researcher will therefore test for the empirical viability of the model using the ordinary least square (OLS) analytical technical. The use of OLS method according to koutsoyians (2001), yields parameter estimates with optimal properties such as unbiased minimum variance and efficient, thereby making the parameter estimates best linear and unbiased (BLUE). Other reasons include that its computational procedure is fairly simple, as compared with other econometric methods.


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