Effects of Monetary Policy on Economic Growth in Nigeria: An Empirical Analysis

Abstract

This study investigates the effect of monetary policy on economic growth in Nigeria from 1982 to 2022, utilizing time series data sourced from the World Development Indicators and the CBN Statistical Bulletin. The specific objectives are to analyze the effects of interest rate, exchange rate, money supply, and cash reserve ratio on gross domestic product (GDP) in Nigeria. The data analysis techniques employed include descriptive statistics, unit root tests, bounds cointegration, the autoregressive distributed lag (ARDL) estimation method, and residual diagnostics tests. The Augmented Dickey-Fuller (ADF) unit root tests reveal a mix of I(1) and I(0) series, indicating that the variables differ in their levels of integration. Evidence of cointegration was established, suggesting a long-term equilibrium relationship among the variables. The ARDL results indicate that money supply has a significant positive effect on GDP in Nigeria, revealing that a unit increase in money supply increases GDP. Cash reserve ratio, exchange rate, and interest rate all show a negative effect on GDP, suggesting that an increase in cash reserve ratio, exchange rate, and interest rates decreases GDP in Nigeria. Owing to these findings, this study concludes that monetary policy significantly influences the growth of real GDP in Nigeria. Thus, it is recommended, among other things, that the Central Bank of Nigeria should consider an expansionary monetary policy stance. This can be achieved by increasing the money supply through open market operations, reducing the monetary policy rate, or lowering the cash reserve requirement for banks. Additionally, the Nigerian government should consider gradually lowering the cash reserve ratio to free up more funds for banks to lend to businesses and consumers. This move can help spur investment and consumption, ultimately boosting real GDP.