Cyclical fluctuations of economic growth and monetary policy in Nigeria: does fiscal policy also matter?

Abstract

ABSTRACT This study investigated the key monetary policy determinants of economic recovery, confirmed the optimum monetary policy target, and assessed the moderating role of fiscal policy in achieving economic growth in Nigeria. A plucking model of Friedman was estimated with Markov-switching, while threshold regression techniques were employed to confirm the monetary policy rate that can ensure economic recovery. Quarterly data, sourced from the National Bureau of Statistics and the Central Bank of Nigeria, between 2010:Q1 and 2019:Q1 were utilised. The results showed a significant asymmetry in the growth cycles with both monetary and fiscal policy found to be pro-cyclical, while increase in reserves in the regime of slow economic growth was not found to be growth supportive. The threshold analyses show that the Treasury Bill rate is pro-economic growth when monetary policy rate is at least 7.8%. While the Treasury Bill is a better monetary instrument that can deliver improved economic growth in Nigeria, the study recommends pro-cyclical policy coordination between monetary and fiscal policy to achieve economic recovery in Nigeria.