Monetary policy and macroeconomic management: A simulation experiment

Eb Udah

doi:10.4314/gjss.v8i1.48857

Abstract

The dynamic nexus between money supply, fiscal deficit, inflation, output and exchange rate management has generated much debate in economic literature in Nigeria in recent times. To contribute to this debate, this paper uses 3SLS estimation technique as well as carried out policy simulation experiment 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 is linked through the government’s net indebtedness to the banking system. The simulation results show that a 20 percent monetary squeeze would reduce inflation rate faster than if the reduction in money supply were 10 percent. This reduction in money supply also leads to a reduction in output, employment and government and government expenditure, which may hurt the domestic economy. Thus, the study concludes that there is a trade off between higher GDP growth and inflation in Nigeria.

Highlights

The poverty of knowledge on the precise quantitative relation among variables in the monetary sector and fiscal sector by policy-makers have, often been explained as the major cause of distortions in key macroeconomic aggregates
This is because a substantial part of the fiscal deficit is financed by the Central Bank of Nigeria (CBN) credit to government and as observed by Tobin (1999) monetary and fiscal policies are distinct only in financially developed countries, where the government does not have to cover budget deficits by printing money or fiduciary issues from CBN
The performance of the economy improved substantially in 2003. This is because available statistics from National Bureau of Statistics (NBS) shows that gross domestic product (GDP) increased by 10.2 per cent, compared to 3.5 per cent in 2002

Summary

Introduction

The poverty of knowledge on the precise quantitative relation among variables in the monetary sector and fiscal sector by policy-makers have, often been explained as the major cause of distortions in key macroeconomic aggregates. In Nigeria, the interaction of the monetary sector and the fiscal sector is of great importance This is because a substantial part of the fiscal deficit is financed by the Central Bank of Nigeria (CBN) credit to government and as observed by Tobin (1999) monetary and fiscal policies are distinct only in financially developed countries, where the government does not have to cover budget deficits by printing money or fiduciary issues from CBN. In such advanced economies, the government can sell obligations to pay money in future, like the U.S Treasury bills, notes, and bonds.

Objectives

Findings

Conclusion