Monetary and Fiscal Policy Interactions and Limitations: The Need for Policy Coordination for Macroeconomic Outcomes in Nigeria

Abstract

Monetary authorities have increasingly focused on implementing policies to ensure price stability and strengthen central bank independence in both developed and developing economies. However, in developing countries (Nigeria inclusive), monetary `policy alone is ineffective in directing the economy towards the stated macroeconomic objectives of domestic output growth, price stability, high employment level, sustainable balance of payments equilibrium, equitable income distribution and poverty reduction. On the other hand, in the area of fiscal, market development has allowed public debt managers to focus more on cost minimization. This ‘divorce’ of monetary and debt management functions calls for the need for effective coordination of monetary and fiscal policy if overall economic performance is to be optimized and maintained in the long term. Therefore an appropriate combination of monetary and fiscal policy mix is crucial for macroeconomic management. This paper employs theoretical technique to analyze monetary and fiscal policy interactions in Nigeria. The paper also surveyed the limitations of both monetary and fiscal policies in a developing economy especially in Nigeria. It analyses the interaction between monetary and fiscal policies, stressing the need for policy coordination in the economy. The paper opines that effective coordination of monetary and fiscal policies without any loss of independence for the policy makers enhances the overall macroeconomic performance of monetary and fiscal policies in the economy.

Keywords: Monetary policy, Fiscal policy, Interaction, Limitation, Coordination