Indirect Monetary Policy Reforms and Output Growth in Nigeria: An Empirical Investigation

Abstract

Monetary policy is a key element of macroeconomic management and its effectiveness is crucial to the overall economic performance of a country. Therefore, the role of monetary policy in ensuring sustainable macroeconomic stability and output growth is crucial to economic development. This explains why efforts are usually made by every economy to enhance the techniques and content of monetary policy. In Nigeria, monetary management has undergone several changes (reforms) since the inception of the Central Bank of Nigeria (CBN). These changes could be grouped broadly into two, namely, those changes which took place when monetary management was largely based on direct controls and those changes which took place in the process of moving away from such controls. The second category of changes, which started to evolve since the adoption of the Structural Adjustment Programme (SAP) is the focus of this paper. The paper investigates the impact of indirect monetary policy reforms on output growth in Nigeria between 1986 and 2009. The methodology employed was the co-integration analysis and the Ordinary Least Squares (OLS). To characterize the time series property of the variables, the Augmented Dickey-Fuller (ADF) test was employed. A causality test performed on the models show that there was a-two-way causality between money supply and output growth during the reform period in Nigeria. The adjusted coefficient of determination (R2) = 0.65 indicates that over 65% changes in the real GDP (RGDP), are explained by changes in the monetary policy variables. However, the result points to the fact that indirect monetary policy instruments have not been effective in stimulating the growth of output in Nigeria during the reform period.The paper submits that for indirect monetary policy instruments to be effective in influencing output growth, the banking sector of the economy also needs to be repositioned to be able to respond positively to the challenges of the conduct of monetary policy, particularly in compliance with the CBN requirements regarding the Central Bank discount rate (CBDR), bank liquidity ratio (BLQR), and bank reserve requirement in the economy (BRRE). The efforts in repositioning these banks through the current banking reforms (recapitalization and consolidation) the paper notes are a right step in the right direction.

Keywords: Indirect monetary policy, Granger – causality, output growth

LWATI: A Journal of Contemporary Research, 9(1),18-34, 2012