Journal of Policy and Development Studies Vol. 9, No.

1 November 2014

ISSN: 157-9385
Website: www.arabianjbmr.com/JPDS_index.php

MONETARY POLICY AND ECONOMIC GROWTH OF NIGERIA

(1981-2012)

Udude Celina C
Department of Economics Ebobyi State Unuversity Abakaliki
[email protected]

Abstract
This study examined the impact of monetary policy on the growth of Nigeria economy between
the period of 1981 and 2012 with the objective of finding out the impact of various monetary
policy instruments (money supply, interest rate, exchange rate and liquidity ratio) in enhancing
economic growth of the country within the period considered. To identify the stationarity
characteristics of the data employed in the empirical investigation, various advanced econometric
techniques like Augmented Dickey Fuller Unit Root Test, Johansen Cointegration Test and
Vector Error Correction Mechanism (VECM) were employed and the following information
surfaced: None of the variables was stationary at level meaning they all have unit roots. But all
the variables became stationary after first difference with the exclusion of money supply.
However, all the variables became stationary after second difference. Hence they were integrated
of order two. The cointegration result indicated that there is long run relationship among the
variable with two cointegrating vectors. The result of the vector error correction mechanism
(VECM) test indicates that only exchange rate exerted significant impact on economic growth in
Nigeria while other variables did not. Equally, only money supply though statistically
insignificant possessed the expected sign while others contradicted expectation. The study
concluded that monetary policy did not impact significantly on economic growth of Nigeria
within the period under review and that the inability of monetary policies to effectively
maximize its policy objective most times is as a result of the shortcomings of the policy
instruments used in Nigeria as such limits its contribution to growth. The study recommended
among others that Commercial banks and other financial intermediaries must be forced to ensure
compliance with the stipulated prudential guidelines.
Keywords: monetary policy, monetary policy, Commercial banks, financial intermediaries,
interest rate, exchange rate
1.1 Introductions
Since its establishment in 1959, the Central Bank of Nigeria (CBN) has continued to play the
traditional role expected of a central bank, which is the regulation of the stock of money in such
a way as to promote the social welfare. This role is anchored on the use of monetary policy that

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is usually targeted towards the achievement of full-employment equilibrium, rapid economic

growth, price stability, and external balance (Fasanya et al, 2013). These objectives are necessary
for the attainment of internal and external balance, and the promotion of long-run economic
growth. Evidence in the Nigerian economy has shown that since the 1980’s some relationship
exist between the stock of money and economic growth or economic activity. Over the years,
Nigeria has been controlling her economy through variation in her stock of money. Hence
monetary policy comprises those government actions designed to influence the behaviour of the
monetary sector.
Over the years, the major goals of monetary policy have often been the two later objectives.
Thus, inflation targeting and exchange rate policy have dominated CBN’s monetary policy focus
based on assumption that these are essential tools of achieving macroeconomic stability (Ajayi,
1999). In Nigeria, monetary policy has been in use since the Central bank of Nigeria was saddled
the responsibility of formulating and implementing monetary policy by Central bank Act of
1958. This role has facilitated the emergence of active money market where treasury bills, a
financial instrument used for open market operations and raising debt for government has grown
in volume and value becoming a prominent earning asset for investors and source of balancing
liquidity in the market. Monetary policy has two fundamental goals to promote maximum
sustainable output and employment and to maintain sustainable price level in the economy. The
job of stabilizing output in the short run and promoting price stability in the long run involves
several steps first, the central bank tries to estimate how the economy is doing now and how it is
likely to do in the medium term, then, it compares this estimates to its goals for the output and
the price level, if there is a gap between the estimates and the goals, the CBN have to decide on
how forcefully and swiftly to act to close the gap. Estimate of the current economic conditions
are not as even as the most up-to-date data on key variables like employment, growth,
productivity etc, largely reflect condition in the past. So to get a reasonable estimate of the
current and medium term economic conditions, the central bank tries to find out what the most
relevant economic developments are such as government spending, economic conditions abroad,
financial conditions at home and abroad and the use of new technologies that boost productivity.
These developments are the incorporated in an economic model to see how the economy is likely
to evolve over time. In doing this, the central bank is confronted with some unexpected
development such as the Niger- Delta crisis that disturbed the oil production and slowed down
the revenue generation by the government they therefore, have to build uncertainties into their
model. Uncertainty seems to be problem at every part of the monetary policy process and there is
yet no set of policy and procedures that policy makers can use to deal with all situations that may
arise (Chimezie, 2012). Indeed, the central bank spends a great deal of time and effort in
researching into the various ways to deal with different kinds of situation.
The economy of Nigeria is faced with unemployment, low investment and high inflation rate and
these factors militate against the growth of the economy. Thus, adopting monetary policy in
manipulating the fluctuations experienced so far in the economy, CBN undertakes both
contractionary and expansionary measures in tackling the problems observed above.
1.2 Statement of the problem
“Monetary policy is known to be a vital instrument that a country can deploy for the maintenance
of domestic price and exchange rate viability, as a critical condition for the achievement of a
sustainable economic growth and external viability”(Amasomma et al, 2011). on a yearly basis,

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the monetary authority formulate guidelines geared towards the enhancement and development
of policy variable designed to ensure optimal performance of the banking industry and ultimately
to advise the macroeconomic goals or objectives but in the implementation of such policy
variable certain conflicting issues are to be addressed ranging from the ability to comply with
various monetary policy guidelines as well as satisfying depositors and shareholders (Chimezie,
2012). Central bank of Nigeria uses various instruments to achieve its stated objective and these
include: open market operation (OMO), required reserve ratio (RRR), bank rate, liquidity ratio,
selective credit control and moral suasion. There have been various regimes of monetary policy
in Nigeria. Sometimes, monetary policy is tight and at other times it is loose, mostly used to
stabilize prices. The economy has also witnessed times of expansion and contraction but
evidently, the reported growth has not been a sustainable one as there is evidence of growing
poverty among the populace. The controversy bothering on whether or not monetary policy
measures actually impact on the Nigerian economy is a problem this study sets to solve.
Therefore, the main thrust of this study is to evaluate the effectiveness of the CBN’s monetary
policy over the years. This would go a long way in assessing the extent to which the monetary
policies have impacted on the growth process of Nigeria using the major objectives of monetary
policy as yardstick.
This study was guided by the research question: to what extent does monetary policy impact on
economic growth of Nigeria and the main objective of the study is to examine the effectiveness
of monetary policy in the Nigerian economy with the specific objective of assessing the impact
of monetary policy instruments on economic growth of Nigeria
2.0. LITERATURE REVIEW
2.1. Theoretical literature
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
monetary policy 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.
2.1.1 THE CLASSICAL MONETARY THEORY
The classical school evolved through concerted efforts and contribution of economists like Jean
Baptist Say, Adam Smith, David Ricardo, Pigou 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 .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
equation of Exchange.
MV= PY
Two very similar quantity theory formulations were used to explain the level of price viz; the
transactions formulation or the Cambridge equation.

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ISSN: 157-9385
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In the transaction version – associated with Fisher and Newcomb, some assumptions were made:
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 changes money
supply. 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
Where 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).
2.1.2 KEYNESIAN THEORY
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 as Keynes aptly puts
it ‘’ In the long run, we also will be dead’’. The Keynesian 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 per say.
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. Thus, the Keynesian theory is a rejection of Say's Law and the notion that the economy
is self regulating.
2.1.3 THE MONETAIST THEORY
The monetarist essentially 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 quantities of real balances demanded a limited number of
Variables.
Monetarists like Friedman 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 authorities..
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 such that demand for money will depend upon
the relative rates of return available or different competing assets in which wealth can be.

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ISSN: 157-9385
Website: www.arabianjbmr.com/JPDS_index.php

2.2 Empirical literature

The impact of monetary policy on growth has generated large volume of empirical studies with
mixed findings using cross sectional, time series and panel data. Some of these studies are
country-specific while others are cross-country. Few of the studies are selected for review as
follows:
Onyeiwu (2012) examines the impact of monetary policy on the Nigerian economy using the
Ordinary Least Squares Method (OLS) to analyse data between 1981 and 2008. The result of the
analysis shows that monetary policy presented by money supply exerts a positive impact on GDP
growth and Balance of Payment but negative impact on rate of inflation. Furthermore, the
findings of the study support the money-prices-output hypothesis for Nigerian economy.
Amassoma et al (2011) examined the effect of monetary policy on macroeconomic variables in
Nigeria for the period 1986 to 2009 by adopting a simplified Ordinary Least Squared technique
found that that monetary policy had a significant effect on exchange rate and money supply
while monetary policy was observed to have an insignificant influence on price instability.
Ajisafe and Folorunso (2002) examined the relative effectiveness of monetary and fiscal policy
on economic activity in Nigeria using co-integration and error correction modelling techniques
and annual series for the period 1970 to 1998. The study revealed that monetary rather than fiscal
policy exerts a greater impact on economic activity in Nigeria and concluded that emphasis on
fiscal action by the government has led to greater distortion in the Nigerian economy.
Adeolu et al (2012) assessed how fiscal and monetary policies influence economic growth and
development in Nigeria. The paper argues that curbing the fiscal indiscipline of Government will
take much more than enshrining fiscal policy rules in our statute books. This is because the
statute books are replete with dormant rules and regulation. It notes that there exist a mild long-
run equilibrium relationship between economic growth and fiscal policy variables in Nigeria.
The paper suggest that for any meaningful progress towards fiscal prudence on the part of
Government to occur, some powerful pro-stability stakeholders strong enough to challenge
government fiscal recklessness will need to emerge.
Hameed et al (2012) presented a review on how the decisions of monetary authorities influence
the macro variables like GDP, money supply, interest rates, exchange rates and inflation. It
asserts that the foremost objective of monetary policy is to enhance the level of welfare of the
masses and it is instrumental to price stability, economic growth, checking BOP deficits and
lowering unemployment. The method of least square OLS explained the relationship between the
variables under study. Tight monetary policy in term of increase interest rate has significant
negative impact on output. Money supply has strong positive impact on output that is positive
inflation and output is negatively correlated .exchange rate also have negative impact on output
which is show from the values. The study recommended that central bank can best contribute to
a nation’s
Economic health by eliminating the price uncertainties associated with inflation.
Chukuigwe (2008) analyze the impact of monetary and fiscal policies on non-oil exports in
Nigeria from 1974 to 2003. Using Ordinary Least Squares estimation, the study revealed that
both interest rate and exchange rate, being proxies for monetary policy, negatively affect non-oil
exports. Budget deficits – proxy for fiscal policy also had a negative effect on non-oil exports.
Based on the findings, the study recommended that there is need to formulate a new strategy to
address the identified challenges. This would be anchored on macroeconomic stability, export

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promotion, rationalization of the role of government, fortification of infrastructural facilities and

stimulation of demand for goods and services since it would create an enabling investment
climate. .
In summary, the overall findings of the works reviewed so far indicate that there is somehow a
general consensus that there is a direct relationship between monetary policy and economic
growth. However, while the robustness of most of the works reviewed could be widely
acclaimed, it will be noteworthy that there are some flaws inherent in some others which could
somehow hinder the robustness of their results and which this work is intended to correct.
3.0. METHODOLOGY
In the course of this work, the research design employed is time series research design. The
researcher adopted the multiple regression analysis based on the classical linear regression
model, otherwise known as Ordinary Least Square (OLS) technique. The estimation covered the
period between 1981 and 2012 while the secondary data obtained from Central Bank (CBN)
statistical bulletin for various years was analysed using E-View 7 econometric package.
3.1. Model Specification
To indulge in empirical analysis between monetary policy and economic growth in Nigeria, real
gross domestic product (RGDP) was used as the endogenous variable while broad money supply
(M2), interest rate (INT), exchange rate (EXR),liquidity ratio (LR) were used as the exogenous
variables.
The model is specified thus:
GDP = b0 + b1M2 + b2INT + b3EXR + b4LR + μ
Where: RGDP = gross domestic product, M2 = broad money supply , INT = interest rate, EXR=
exchange rate, LR = liquidity ratio, μ= stochastic variable or error term, b0 = constant term , b1
and b2, b3 and b4 = parameters to be estimated
A PRIORI EXPECTATION
b1 and b4 > 0, b2 and b3 < 0
3.2. Estimation Procedure
The time series properties of data employed in the estimation equation is tested for stationarity
using Augmented-Dick-Fuller (ADF) unit root test in order to avoid the problem of spurious
regression. To investigate whether there is existence of long run relationship among the variables
in estimation, the Johansen test for co-integration was employed. An Error Correction
Mechanism is employed to ascertain the speed of adjustment from the short run equilibrium to
the long run equilibrium state. The functional form, on which our econometric model was based,
employed a multiple regression equation model in this work.
In estimating the model we relied on the developments in the co integration theory, otherwise
referred to as the “error correction mechanism” using the vector error correction mechanism
(VECM)
4.0. PRESENTATION AND ANALYSIS OF RESULTS
The variables considered in this research work are : Gross Domestic Product (GDP) at current
basic prices (dependent variable) and the independent variables include: money supply (M2),
interest rate (INT), exchange rate (EXR), and inflation rate (INF). The empirical results are
presented below:

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4.1 PRESENTATION OF RESULT

4.1.1 UNIT ROOT TEST
The Augmented Dickey-Fuller (ADF) test result is presented below:
Table1: Augmented Dickey Fuller Unit Root Test at level
Trend and intercept
Series ADF Test 5% critical Order Remarks
Statistic values

GDP 2.369742 -3.568379 I(0) N.S

M2 3.108624 -3.562882 I(0) N.S

INT -2.043321 -3.568379 I(0) N.S

EXR 1.775392 -3.562882 I(0) N.S

LR -3.106574 3.562882 I(0) N.S

Table 2: Augmented Dickey Fuller Unit Root Test with intercept at first difference
Series ADF Test 5% Order Remarks
Statistic critical
values
GDP -6.203966 -3.568379 I(1) S

M2 -2.913058 -3.568379 I(1) N.S

INT -8.796299 -3.568379 I(1) S

EXR -4.218399 -3.568379 I(1) S

LR -5.456200 -3.568379 I(1) S

Table3: Augmented Dickey Fuller Unit Root Test with intercept at second difference
Series ADF Test 5% critical Order Remarks
Statistic values

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GDP 6.049264 -3.580623 I(2) S

M2 -8.433386 -3.574244 I(2) S

INT -9.545361 -3.580623 I(2) S

EXR -6.164577 -3.580623 I(2) S

LR -6.278649 -3.580623 I(2) S

Table 1, 2 and 3 above represent the results of the Augmented Dicey Fuller unit root tests both at
level, first difference and second difference respectively.

As can be seen from the table, at 5 percent level of significance, none of the variables was
stationary at level since by comparison, their critical values were greater in absolute values than
their augumented dicey fuller (ADF) test statistics. At first difference, GDP, INT, EXR, and LR
became stationary while M2 was still not stationary. However, at second difference, all the five
variables; GDP, M2, INT, EXR and LR were stationary since their Augmented Dicey Fuller Test
Statistics(6.049264, -8.433386, 9.545361 , 6.164577 , -6.278649) were all greater than their
critical values (-3.580623, -3.574244 , -3.580623 , 3.580623 , 3.580623) respectively at 5
percent level of significance .Thus, the series are stationary and integrated of order two, I(2).

Table 4: CO-INTEGRATION RESULT

Eigen Value Trace Statistic 0.05 Critical Prob.** Hypothesized
Value No. of CE(s)

0.790394 97.14515 69.81889 0.0001 None *

0.556369 50.26932 47.85613 0.0291 At most 1

0.404236 25.88645 29.79707 0.1321 At most 2

0.265854 10.34912 15.49471 0.2548 At most 3

0.035286 1.077699 3.841466 0.2992 At most 4 *

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The results of the cointegration in Table 4 above indicated that the trace statistics is greater than the
critical value at 5 percent level of significance in at least one of the hypothesized equations. This confirms
that there is at least one cointegration relationship among the various variables used to model the
relationship between monetary policy and economic growth in Nigeria for the period under investigation.
Specifically, the results of the cointegration test suggested that economic growth, proxied by Gross
Domestic Product (GDP) at current price had equilibrium relationship with Money supply (M2), interest
rate (INT), exchange rate (EXR) and liquidity ratio (LR) which kept them in proportion to each other in
the long run..
4.1.3 VECTOR ERROR CORRECTION MODEL (ECM)
As noted, error correction mechanism (ECM) is meant to tie the short-run dynamics of the cointegrating
equations to their long-run static dispositions. In order to capture the short run fluctuation, the Vector
Error Correction Method (VECM) was employed and the result is presented below.
Vector Error Correction Estimates
Date: 08/13/14 Time: 00:05
Sample (adjusted): 1983 2012
Included observations: 30 after adjustments
Standard errors in ( ) & t-statistics in [ ]

Cointegrating Eq: CointEq1

GDP(-1) 1.000000

M2(-1) -1.988544
(0.25709)
[-7.73487]

INT(-1) -22652.54
(110055.)
[-0.20583]

EXR(-1) 41027.73
(15184.8)
[ 2.70189]

LR(-1) -225225.2
(56859.3)
[-3.96110]

C 4807090.

Error Correction: D(GDP) D(M2) D(INT) D(EXR) D(LR)

CointEq1 0.239169 0.093877 -8.96E-08 -6.84E-07 2.20E-06

(0.09151) (0.02406) (2.6E-07) (1.2E-06) (5.7E-07)
[ 2.61358] [ 3.90111] [-0.34538] [-0.59306] [ 3.85955]

D(GDP(-1)) -0.281843 -0.129000 -4.90E-07 1.47E-06 -3.08E-06

(0.23402) (0.06154) (6.6E-07) (3.0E-06) (1.5E-06)
[-1.20438] [-2.09625] [-0.73885] [ 0.49969] [-2.11138]

D(M2(-1)) 0.454268 0.479681 9.24E-07 5.89E-06 -1.10E-05

(0.60157) (0.15819) (1.7E-06) (7.6E-06) (3.8E-06)
[ 0.75514] [ 3.03227] [ 0.54204] [ 0.77641] [-2.92845]

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D(INT(-1)) 33637.52 3319.204 -0.516124 0.640522 0.429604

(56384.6) (14827.3) (0.15980) (0.71078) (0.35166)
[ 0.59657] [ 0.22386] [-3.22977] [ 0.90115] [ 1.22166]

D(EXR(-1)) 44010.72 2110.924 -0.077366 0.277546 -0.050537

(17602.7) (4628.93) (0.04989) (0.22190) (0.10978)
[ 2.50023] [ 0.45603] [-1.55077] [ 1.25077] [-0.46034]

D(LR(-1)) -41012.51 5212.707 -0.094907 0.146462 0.115120

(33334.6) (8765.89) (0.09448) (0.42022) (0.20790)
[-1.23033] [ 0.59466] [-1.00458] [ 0.34854] [ 0.55373]

C 1504893. 431427.4 0.534270 -4.621812 8.478978

(435224.) (114450.) (1.23349) (5.48644) (2.71438)
[ 3.45774] [ 3.76958] [ 0.43314] [-0.84241] [ 3.12373]

R-squared 0.623930 0.795894 0.429869 0.150658 0.464141

Adj. R-squared 0.525825 0.742650 0.281140 -0.070909 0.324351
Sum sq. resids 4.33E+13 2.99E+12 347.6290 6877.436 1683.398
S.E. equation 1371740. 360722.4 3.887712 17.29216 8.555187
F-statistic 6.359810 14.94780 2.890271 0.679965 3.320284
Log likelihood -462.5303 -422.4585 -79.31723 -124.0902 -102.9787
Akaike AIC 31.30202 28.63057 5.754482 8.739348 7.331916
Schwarz SC 31.62897 28.95751 6.081428 9.066294 7.658862
Mean dependent 1349834. 462653.4 0.218000 -0.364000 0.260000
S.D. dependent 1992061. 711067.1 4.585343 16.70987 10.40804

Determinant resid covariance (dof adj.) 2.93E+28

Determinant resid covariance 7.76E+27
Log likelihood -1176.117
Akaike information criterion 81.07450
Schwarz criterion 82.94276

From the VECM result presented above, the coefficient of the constant term is 1504893 implying that at
zero performance of the various explanatory variables used, Gross Domestic Product (GDP) will stand at
1504893 units.
The coefficients of GDP (-1) is -0.282. This implies that a unit increase in GDP lagged for one year will
bring about a decrease in GDP by 0.282 units. the coefficient of LM2(-1) is 0.454 implying that a unit
increase in broad money supply lagged by one year will bring about a 0.452 unit increase in GDP .
Similarly, The coefficients of INT (-1) is 33637.52 implying that a unit increase in a year period lagged
of interest rate will bring about a 33637.52 unit increase in GDP. EXR(-1) has a coefficient of 44010.72
meaning that a unit increase in exchange rate will bring about a 44010.72 unit increase in GDP. Finally,
liquidity ratio (LR) when lagged by one period has a coefficient of -41012.51 showing equally a negative
relationship with GDP. Hence, a unit increase in liquidity ratio when lagged by one year will bring about
a -41012.51 unit decrease in GDP.
The above result indicates that the R2 is 0.624 indicating that the explanatory variables explain about
62% of the total variations in GDP during the period under consideration.
However, the coefficient of ECM is 0.239. The coefficient reveals that there is no speed of adjustment
between the short-run and long-run realities of the cointegrating equations annually. This is because; the
ECM coefficient is not consistent with the assumed negative value.

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To determine whether the estimated parameters are statistically significant or not, a system equation was
estimated using ordinary least square and the result is presented below:
System: UNTITLED
Estimation Method: Least Squares
Date: 08/13/14 Time: 00:06
Sample: 1983 2012
Included observations: 30
Total system (balanced) observations 150

Coefficient Std. Error t-Statistic Prob.

C(1) 0.239169 0.091510 2.613578 0.0102

C(2) -0.281843 0.234016 -1.204378 0.2309
C(3) 0.454268 0.601567 0.755141 0.4517
C(4) 33637.52 56384.58 0.596573 0.5520
C(5) 44010.72 17602.69 2.500227 0.0138
C(6) -41012.51 33334.56 -1.230330 0.2211
C(7) 1504893. 435224.2 3.457741 0.0008

Equation: D(GDP) = C(1)*( GDP(-1) - 1.98854381212*M2(-1) -

22652.5364858*INT(-1) + 41027.7323024*EXR(-1) -
225225.232546
*LR(-1) + 4807090.26348 ) + C(2)*D(GDP(-1)) + C(3)*D(M2(-1))
+ C(4)
*D(INT(-1)) + C(5)*D(EXR(-1)) + C(6)*D(LR(-1)) + C(7)
Observations: 30
R-squared 0.623930 Mean dependent var 1349834.
Adjusted R-squared 0.525825 S.D. dependent var 1992061.
S.E. of regression 1371740. Sum squared resid 4.33E+13
Durbin-Watson stat 1.887475

From the system equation above, it will be seen that it is only the coefficient of ECM and exchange rate
that are statistically significant at 5 percent level of significance while the coefficients of other variables:
money supply, interest rate, and liquidity ratio were not statistically significant. This is judged by their p-
values given in the system equation. Hence, the p-values of ECM coefficient (0.0102) and coefficient of
EXR (0.0138) were all less than 0.05 while the p-values of other variables are greater than 0.05.
Durbin-Watson (second order) test:
Finally, the Durbin -Watson statistics indicates that
Lower D-W (dL) =1.19
Upper D-W (dU) = 1.73
Where D-W calculated = 1.89
Since the calculated D-W statist5ics is greater than the upper D-W tabulated value, we accept the null
hypothesis that there is absence of first order autocorrelation.

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4.2 IMPLICATION OF THE STUDY

The VECM result presented above shows that GDP has a negative relationship with LR and a positive
relationship with M2, INT and EXR. Only the Relationship between GDP and M2 conforms to a priori
expectation while that between GDP and LR does not conform to the a priori expectation. It was expected
that the higher the higher of liquidity of the economy which is evident by high liquidity ratio, the higher
the level of economy activities which could ultimately translate into higher economic growth but the
findings from this study showed the opposite. Equally, from a priori, GDP ought to have negative
relationship with both exchange rate and interest rate both findings reveal that the reverse were the case as
interest rate and exchange rate turned out to be positively related to gross domestic product.
Hence only the coefficient of money supply (M2) conforms to a priori expectation.
4.3 TEST OF HYPOTHESIS
Ho: Monetary policy instruments do not have significant impact on economic growth in Nigeria
To test for this hypothesis, we take a look at the relationship between the various instruments of monetary
policy and economic growth of Nigeria from the VECM result. From the result, it was observed that only
the coefficient of M2 conforms to expectation since it had positive relationship with GDP, while LR had
negative relationship with GDP contrary to a priori and that INT and EXR had positive relationship with
GDP equally in contrast to a priori. From the above, coupled with the fact that outside the coefficient of
exchange rate (EXR), none of the Other Variables Was Significant At The 5 % Level Of Significance,
we therefore accept the null hypothesis and conclude that monetary policy instruments do not impact
significantly on economic growth in Nigeria for the period reviewed.
5.1 Summary of findings
The study investigated empirically the relationship between monetary policy and economic growth of
Nigeria for the period between 1981 and 2012 employing various techniques of econometric analysis. In
the course of the study, the main objective was to determine empirically the impact of monetary policy
instruments on economic growth in Nigeria.
The Vector Error Correction Mechanism (VECM) test which was used to determine the impact of the
independent variables (M2, INT, EXR and LR) on the dependent variable (GDP) showed that only broad
money supply had a positive though statistically insignificant relationship with GDP. Liquidity ratio has
negative relationship with GDP while exchange rate and interest rate have positive relationship with GDP
contrary to economic expectation.
Equally, the coefficient of ECM indicated that the speed of adjustment of the model does not conform to
the expected negative sign.
5.2 Recommendations
Based on the findings, the following recommendations are made:
1. For effective operation of the monetary policy measures in the Nigerian economy, the Central
Bank of Nigeria should be granted full autonomy on its monetary policy functions. Partial
autonomy should be replaced with full autonomy for the central banks in the developing
economies at large which is invariably subjected to government interference and its politics.
2. Commercial banks and other financial intermediaries must be forced to ensure compliance with
the stipulated prudential guidelines. Any deviation from the set regulations should be punished to
serve as a deterrent to others.
3. Finally, since Global experience has indicated that monetary policy must work in random to
create the right macroeconomic framework, in other word monetary policy to a great extent
depends on coordination with fiscal policy; these two phenomena should be articulated in order to
bring out effective results. Therefore, the execution of monetary policy through its techniques
requires effective and prudent management on the part of the monetary authorities.

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5.3. Conclusion
The role of the Central bank in regulating the liquidity of the economy which affects some
macroeconomic variables such as the output, employment and prices cannot be over-emphasised. This
study applied vector error correction mechanism (VECM) to determine the impact of monetary policy in
the Nigeria’s economic growth for the period 1981-2012. It is evident from the result that monetary
policy did not impact significantly on economic growth of Nigeria within the period under review. This
study concludes therefore that the inability of monetary policies to effectively maximize its policy
objective most times is as a result of the shortcomings of the policy instruments used in Nigeria as such
limits its contribution to growth.
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