ANALYSIS OF MONETARY POLICY EFFICACY ON OUTPUT AND PRICES IN NIGERIA: A VECTOR ERROR CORRECTION APPROACH
Abstract
Literatures on monetary policy have revealed the need for frequent study to ensure sound
economic stability as a panacea for economic growth and development. In view of this, the study
gives analysis of monetary policy efficacy on output and prices in Nigeria, with the aid of vector
error correction approach from 1986 to 2015. It utilises a pair of models consisting of real
broad money supply (LRBMS), real interest rate (RINTR), real exchange rate (LRER) and
macroeconomic variables such as consumer price index (LCPI), real gross domestic product
(LRGDP) and government dominance level (LGDL). The baseline model employed (LRGDP) as
the dependent variables against other variables, while LCPI represents the dependent variables
in the Alternative model. Augmented Dickey-Fuller (ADF) and Philips Perron (PP) tests
revealed stationarity at first difference in all the variables. Co-integration test results show a
stable long run equilibrium relationship among all variables with two co-integrating equations
from the trace tests. The vector error correction for the Baseline and Alternative models
revealed that both interest rate and exchange rate play prominent roles in determining output
growth and price stability in Nigeria, subsequently by money supply. While exchange rate,
interest rate and output level respectively quickly adjust to shock in the economy. The study
finally recommends that the autonomy of the Central Bank should be strengthened to discharge
its statutory mandate by limiting undue credit to the government, and government should be
made to balance its budgets and also borrow at the market rates to finance its deficits.
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