Healthy interaction between fiscal and monetary policies; A panacea for economic development and sustainability

Abstract

A healthy fiscal and monetary policies form the basis for economic growth and sustainability of an economy. This work seeks to look at the effect of monetary and fiscal policies on economic growth in Nigeria, to examine how government tax alter the effect of monetary policy, To see how interaction of government recurrent expenditure with monetary policy does alter the effect of monetary policy rate, money supply and inflation on economic growth in Nigeria, and to see if the interaction of government capital expenditure with monetary policy affects monetary policy rate, money supply and inflation on economic growth in Nigeria. This study uses time series data from 1995 to 2021 which were sourced from the Central Bank of Nigeria Statistical Bulletin. The variables used in this study include; Money Supply (MS), Inflation (INF), Monetary Policy Rate (MPR), Government Tax Revenue (GTAX), Total Government Capital Expenditure (TGCE) and Total Government Recurrent Expenditure (TGRE). The data were examined using Ordinary Least Square Regression method and the robustness of the model was tested using post-estimation techniques such as Durbin-Watson test for autocorrelation, Jarque-Bera test for normality, Breusch-Godfrey Serial Correlation test and the Ramsey RESET test for specification correctness. Findings indicate that contractionary policies have caused reduced economic growth and the increase in monetary base in the economy has contributed significantly to economic growth. The study recommends Contractionary monetary policies should be matched with increase in taxation while expansionary monetary policies should be combined with a downward review of tax rates in the country.