Monetary policy shock and economic growth in Nigeria

Abstract

This study examines the effects of monetary policy shocks on economic growth in Nigeria using a Vector Error Correction Model (VECM). Annual data from 1990 to 2022 on real GDP (LogGDP), interest rate (Ir), exchange rate (LogEr), and money supply (Ms) are analyzed. The Johansen cointegration test confirms a long-run equilibrium relationship among the variables, while the error correction term (ECT) is negative and significant, indicating a 40% speed of adjustment toward equilibrium. In the short run, interest rate and exchange rate shocks negatively and significantly affect GDP, suggesting that tighter monetary conditions and currency depreciation dampen growth. Conversely, money supply positively and significantly influences GDP, affirming the Keynesian and monetarist view that liquidity expansion can stimulate output. The findings are consistent with the Quantity Theory of Money, which asserts that changes in money supply have direct implications for output and prices. Based on the results, the study concluded that monetary policy is a vital tool for stimulating economic activity in Nigeria. It recommends that policymakers reduce interest rates, stabilize the exchange rate, and moderately increase money supply to promote short-term and long-term growth.