Impact of Monetary Policy on Economic Growth in Nigeria: Vector Error Correction Mechanism Approach
Mukhtar Nazifi Muhammed *
Department of Economics, Bauchi State University Gadau, Nigeria.
Damina Hamid Babawulle
Department of Economics, Bauchi State University Gadau, Nigeria.
Hussaini Mairiga Tahir
Department of Economics, Bauchi State University Gadau, Nigeria.
*Author to whom correspondence should be addressed.
Abstract
Monetary policy as a technique of economic management to bring about sustainable economic growth and development has been the pursuit of many nations. Using annual data over the period 1981 to 2016, this paper examined the impact of monetary policy on the Nigerian economy. In doing this, Augmented Dickey-Fuller unit root test, Vector error correction mechanism (VECM) and the ordinary least squares (OLS) method, were employed to analyze the time series data for the period between 1981 and 2016. The result of the analyses shows that monetary policy represented by money supply exerts a positive impact on GDP growth with negative impact on rate of inflation. The recommendations are that monetary policy should facilitate a favourable investment climate through appropriate interest rates, exchange rate and liquidity management mechanism and the money market should provide more financial instruments that satisfy the requirements of the ever-growing sophistication of operators.
Keywords: Monetary policy, economic growth, transmission mechanism, liquidity management mechanism, favourable investment and vector error correction mechanism