Impact Of Monetary Policy Conditions On Selected Macroeconomic Indicators In Nigeria (1999q1-2024q4)
Umar Ibrahim Babale, Mohammed Auwal Musa
Keywords: Monetary policy, Central Bank, exchange rate, inflation, money supply JEL Classification: E52, E58, E31, F31
Abstract
This study analyzes the influence of monetary policy conditions on a set of
macroeconomic variables: price level, money supply, exchange rate, and real
output in Nigeria using quarterly data for the period of 1999 to 2024. A
Monetary Policy Condition (MPC) Index was developed in order to come up
with a composite index that reflects the overall stance of the monetary policy in Nigeria, as opposed to using the interest rate alone. The study used the structural vector autoregression model where five variables including the MPC Index were included based on the Financial Conditions Theory. The
Augmented Dickey-Fuller unit root test found all variables to be integrated
of order one, whereas the Johansen cointegration test found no cointegration between the variables. For this reason, estimation of the SVAR model in first difference was undertaken. From the results, a one standard deviation shock in MPC Index leads to an increase in the price level, a decrease in money supply by about 11% over a period of ten quarters, depreciation of the naira relative to the US dollar, and persistent decreases in real output over the forecast horizon. Of the variables, the exchange rate proved to have the strongest effect, with the MPC Index shocks accounting for about 38% of the forecast error variance of the exchange rate over a period of ten quarters. The study concludes that despite the fact that tightening of monetary policy results
in reduction of the money supply and economic growth, there is no reduction in the inflation rate, which instead causes depreciation of the exchange rate. The study recommends that in order to achieve stability of the economy, the Central Bank of Nigeria should complement monetary policy with other policies such as exchange rate policy and supply-side policy.
Author Biography
Umar Ibrahim Babale
Central Bank of Nigeria
Email: [email protected]
Mohammed Auwal Musa
Department of Economics, Federal University Wukari, Taraba State, Nigeria
Email: [email protected]