Monetary Policy and Long Run Economic Growth in Nigeria: An Application of the Vector Error Correction Mechanism

Abstract

The inability of most developing economies to use monetary policy to engender real economic growth in their countries prompted the researchers to empirically assess the impact of monetary policy on economic growth in Nigeria between 1980 and 2014. The study employed an econometrics approach making use of the ADF unit root test, Johansen cointegration, Vector error correction model, Pairwise granger causality test and variance decomposition. The Vector Error Correction Mechanism result shows a positive short and long run relationship between both narrow money supply and broad money supply and economic growth in Nigeria with model strength of 75%. The Pairwise granger causality test shows a bi-directional causality between broad money supply and economic growth in Nigeria and was statistically significant at 5% level of confidence. Recommendations were for the government to use her contractionary monetary efforts and implement relevant policies to curtail the inverse effect of the persistent variation in the value of exchange rate, price level and interest rate in Nigeria and adequate regulation of the quantity of money in circulation to avoid hyperinflation and other unpredictable monetary volatilities.