Does Monetary Policy Stimulates Macroeconomic Performance during Economic Downturn in Nigeria?

Abstract

This study investigated the relationship between monetary policy and macroeconomic performance in Nigeria during 1981-2018. The stochastic properties of the time series data were examined using both conventional and unit root tests with structural breaks to account for shift dummy in the series. Their results indicates that the series are combination of both I(0) and I(1) in the same specification which prompted the use of ARDL. The results revealed that in the short run, lag value of inflation rate, exchange rate appreciation and unexpected appreciation (i.e., shift_dummy) could reduce inflation rate while lower MPR and high volume of money in circulation could stimulate inflation rate. Also, lag value of unemployment rate, high MPR and exchange rate depreciation significantly stimulate unemployment rate while unexpected appreciation reduce it. Low MPR and exchange rate depreciation could stimulate GDP growth rate while unexpected appreciation in exchange rate retards GDP growth in Nigeria. In the long run, inflation rate is constrained by exchange rate appreciation while depreciation promotes growth but stimulate unemployment rate in Nigeria. Also, MS2 stimulates inflation and unemployment rate but produce negative effect on GDP growth in Nigeria. Based on the results, the policy implications were drawn for Nigeria. Monetary authority should use its policy instruments to minimize pressures on the exchange rate, inflation and foreign reserves. This could be done by design policy measures that promote the value of Naira and check exchange rate fluctuation. Also, monetary policy instruments must be as supportive so as to ensure price stability, reduce unemployment rate and consequently brings about economic growth.