An Empirical Analysis of Effectiveness of Monetary and Fiscal Policy Instruments in Stabilizing Economy: Evidence from Nigeria

Abstract

This paper empirical study the effectiveness of monetary and fiscal policy instruments in stabilizing Nigerian economy from 1981-2015. The data were sourced from Central Bank of Nigeria, National Bureau of Statistics and World Development Index (WDI). The data was tested for stationarity using Augmented Dickey Fuller (ADF test while the co-integration was conducted using Johansen's methodology. Error Correction Model (ECM) was employed for the empirical analysis. The results show that, there is long run equilibrium relationship between monetary and fiscal policy instruments and economic growth in Nigeria. ECM has the expected negative sign and is between the accepted region of less than unity. This was confirmed by the positive relationship between money supply, government expenditure and revenue while interest rate and budget deficit have negative relationship with economic growth. Therefore, it recommended that there should be effective use of money supply and government expenditure as key instruments of monetary and fiscal policy in Nigeria in order to improve the economy. Also, government annual budget implementation and execution of projects should be monitored to ensure that the objectives of the budget is achieved, which include price stability, economic growth, increase employment, income distribution among others. This can be done by eliminating corruption, leakages of resources and inappropriate use of resources. Interest rate should the reduced to one-digit to encourage borrowing, increase investment and output. These will bring the economy to a steady state.