Munich Personal RePEc Archive

The Impact of Fiscal and Monetary Policy on Nigerian Economic Growth

Bodunrin, Olalekan Samuel (2016): The Impact of Fiscal and Monetary Policy on Nigerian Economic Growth.

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Abstract

This study investigated the impact of fiscal and monetary policy on Nigerian economic growth from 1981 to 2015, with the interest in exploring which of fiscal or monetary policy has been effective in propelling economic growth in Nigeria and how GDP growth responds to the monetary and fiscal policy shock. The positive impact of these policy tools on economic performance will help the country achieve sustained growth and while reducing economic instability. Time series data were collected from the central bank of Nigeria (CBN), the international monetary fund (IMF) and the World Bank. Firstly, a vector autoregressive model (VAR) was applied, and then the vector error correction (VEC) model. The VAR model revealed that fiscal policy distorted real GDP but died out after one year, while monetary policy had no significant impact on real GDP. Of the total government expenditure, the impact of capital expenditure was found to have a significant impact on real GDP while the impact of recurrent expenditure was insignificant. With the introduction of VEC model, the study found an unexpected shock on money supply, real effective exchange rate and taxes to have a negative permanent effect on real GDP, while an unexpected shock on recurrent expenditure and capital expenditure to have a positive effect on real GDP. Finally, the study recommends fiscal policy leadership and harmonization between the fiscal and monetary authority, with emphasis on channelling resources to where they are most needed.

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