Effects of monetary policy on macro economic performance: the case of Nigeria

The objective of this study is to empirically examine the effects of monetary policy on macroeconomic performance in Nigeria. The study uses Quarterly data between 1970 Q1 to 2011Q4, being a sample period of forty one years. The study further, introduces structural break to investigate the presence of a possible structural change which takes into account the effects of the Structural Adjustment Programme introduced by the Nigerian government in the 1987. The data was split into two sub-periods from 1970Q1–1986Q4, era before the Structural adjustment programme, and from 1987Q1 – 2011Q4, period after the Structural Adjustment Programme in Nigeria. In this study, three approaches were utilised in the methodology. First, estimation and analysis was based on coefficients of the variables using long-run and co-integrating Vector Error Correction Model (VECM). The results confirm my a priori expectation, although many of the variables were not statistically significant. The study also estimates the period 1970Q1–2011Q4, without a structural break for the GDP model having been confirmed in a structural break test. Therefore, we accept the null hypothesis which means that there was no structural break in real domestic growth during the structural adjustment programme, introduced in 1987. However, the structural break tests for consumers’ price index (CPI) and balance of payments (BOP) show that the parameters of the analysed equations were not stable given that recursive errors cut across the critical lines for both tests. As a result of the foregoing, we reject the null hypothesis meaning that there was a structural break for the CPI and (BOP) models. This means that the structural adjustment programme introduced in 1987 brought about a change in CPI and BOP in the Nigerian economy. In the second approach of the methodology, a macroeconomic model was simulated to demonstrate the effects of monetary policy on macroeconomic performance. Thus, the results obtained from the simulation are impressive and generally satisfactory; the results suggest the effectiveness of monetary policy implementation for counter cyclical income stabilization, BOP stabilization and CPI stabilization in Nigeria. In the third approach of my methodology, three structural vector autoregressive (SVAR) econometric models were formulated to trace the effects of monetary policy shocks on domestic output, consumers’ price index and balance of payments position in Nigeria. Structural effects of monetary shocks or innovations were captured by the impulse response functions and the forecast error variance decomposition. The empirical impulse-response assessment indicates that an exogenous shock to the short-term interest rate has the most significant positive effect on real domestic output and consumers’ price followed by a transitory effect of the broad money. The response of the country’s external payments’ position to a structural shock as measured by a one-standard deviation innovation in all the policy variables is almost zero. The policy implication is straightforward- monetary policy in Nigeria is effective in maintaining internal balance and ineffective in achieving external balance. Overall, the results suggest that monetary policy affects macroeconomic performance in Nigeria.