Abstract
The dynamic nexus between money supply, fiscal deficit, inflation, output and exchange rate management has recently generated much debate in economic literature in Nigeria. To contribute to this debate, this paper uses the co-integration and error correction framework of analysis and also conducts policy simulation experiments to investigate how monetary variables interact with aggregate supply, demand and prices in order to aid stabilization policies. The results show that monetary variables and government finance are linked through government’s net indebtedness to the banking system. The simulation results show that a 20 per cent monetary squeeze would reduce the inflation rate faster than if the reduction in money supply were 10 per cent. This reduction in money supply would also lead to a reduction in output, employment and government expenditure, which may hurt the domestic economy. The paper thus concludes that there is a trade-off between higher GDP growth and inflation in Nigeria.
Highlights
The poverty of knowledge on the part of policy-makers as far as the precise quantitative relation among variables in the monetary and fiscal sectors is concerned has often been offered as the major cause of distortions in key macroeconomic aggregates
One of the objectives of this study is to investigate the dynamics in the interaction of monetary variables with various sub-sectors of the Nigerian economy
The result shows that growth rate in money supply is fuelled by large fiscal deficits and that fiscal discipline should be practised by keeping to budgetary provisions
Summary
The poverty of knowledge on the part of policy-makers as far as the precise quantitative relation among variables in the monetary and fiscal sectors is concerned has often been offered as the major cause of distortions in key macroeconomic aggregates. The major source of macroeconomic instability has often been attributed to the increasing magnitude of the money supply, which exerts pressure on the exchange rate and domestic demand and on prices. The upward movement in prices is attributed to the excess liquidity in the banking system arising from, once again, the monetisation of enhanced crude oil export receipts This observed instability in key macroeconomic variables calls into question whether policymakers precisely understand the quantitative relationship between variables in the monetary and the real sectors, and how monetary stimulus affects various sub-sectors of the economy. The study will be significant in assisting policy-makers to gain useful insights into how monetary policy variables affect the various sub-sectors of the Nigerian economy. In section five the researchers make some useful recommendations and concluding comments
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