THE IMPACT OF MONETARY POLICY ON ECONOMIC GROWTH IN NIGERIA
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Abstract
This research work evaluates the responses of inflation, interest and exchange rate to shocks in Monetary Policy (captured by MPR) as well as the impacts of MPR on these Macroeconomic Variables. The study used monthly data spanning from December, 2006 (when the MPR was introduced) through February, 2012. Following Joao and Andrea (2006), the research used Structural VAR to estimate the model. The result shows that inflation responds to shocks in MPR only in a fairly unstable manner (a pattern that is almost unpredictable); in the first four periods, positive shocks in MPR could not bring down inflation but thereafter, any further increase in MPR produced gradually declining but positive rate of interest. On the other hand, exchange rate responds to shocks in MPR in a relatively downward fashion and quickly assumes upward trend from the second period lasting throughout the period, while interest rate, responds quickly and positively to shocks in MPR from the first thorough the last period.
Therefore, interest and exchange rates are more responsive to shocks in MPR than inflation and above all sometimes changes in MPR cannot guarantee the expected changes in Inflation (because of large informal sector as well as policy divergence between the monetary and fiscal authorities among other reasons). Hence, of all the three variables, inflation is the most difficult to deal with and stability of which is a necessary condition for the achievement of stability in the other two variables (interest & exchange rates). More so, interest and exchange rates as well as MPC meetings are better predictors of MPR (because of their high sensitivity to it) than the rate of inflation. The result also uncovered that as the most difficult enemy of the economy, inflation cannot be effectively and efficiently conquered with the variation in MPR alone, other instruments particularly Cash Reserve Requirement (CRR) and especially Open Market Operations (OMO) should be prudently used to compliment the efficacy of MPR. Consequently, the paper further recommends the current monetary tightening stance of CBN but should be used with caution, improvement and expansion of the cash-lite policy and non-interest banking of the CBN, infrastructural development, harmonization of fiscal and monetary policy as well as the reduction in the number of MPC meetings to at most quarterly unless in case of emergency.
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