Impact of Monetary Policy on Economic Diversification in Nigeria: Further Empirical Analysis

Abstract

One of the key objectives of the government’s economic policy is the prosperity and stability of the economy. It intends to achieve this by increasing the economy’s competitiveness in the global economic arena. However, besides the macroeconomic policy, another key determinant of an economy’s competitiveness is the extent of its diversification, understood in this context to mean the degree to which the economy moves away from a dominant income-earning sector or product to other ones. In view of this, study examined the impact of monetary policy on economic diversification in Nigeria using data for the period 1991 to 2021 and the Autoregressive Distributed Lag (ARDL) bounds testing approach. The study made use of diversification index as the dependent variable, money supply, real exchange rate, gross fix capital formation, labour force ,as independent variables. Secondary time series data were collected from the Central Bank of Nigeria Statistical Bulletin, National Bureau of Statistics (various years/issues). Descriptive statistics and multiple regression analysis based on the ARDL technique. Based on the results obtained, the study shows that money supply, gross fix capita formation and labour force affects economic diversification positively while real effective exchange rate affects economic diversification negatively. The study therefore recommends that monetary authorities should be encouraged to increase money supply as this has similar benefit of increasing private consumption. Furthermore, maintaining a favourable external reserves should be pursued by the monetary authorities.