Monetary Policy Effectiveness, Output Growth and Inflation in Nigeria

This study examined the effectiveness of monetary policy on economic growth and inflation in Nigeria over the period 1970 to 2011. The lag selection criteria all indicated an optimum lag length of one, therefore a VAR (1) model was estimated using GDP, INTR, CPI, and M2 as endogenous variables. The model was dynamically stable and showed no evidence of serial correlation. Estimation results showed that in the short run it is output and inflation that drives monetary growth, while output growth is affected by inflation only. Results from the impulse response and variance decomposition showed that monetary policy variables may not have an instantaneous impact on output, but are key determinants of output growth in the long–run. Furthermore, in the short–run the level of production is more important in controlling inflation, but it is monetary policy variables that matter in the long–run. Therefore, there is the need to differentiate between short and long run monetary policy targets. It was recommended that, policy makers should concentrate on short-run output expansion policies and put measures in place to sustain growth in the long-run to control inflation. But to maintain long-run output expansion, monetary authorities should aim at adjusting the inter-bank rate but with caution as this can instead cause the problem it is meant to solve