THE EFFECT OF FISCAL POLICY ON THE RELATIONSHIP BETWEEN MONETARY POLICY AND MACROECONOMIC VARIABLES IN NIGERIA

Abstract

This study examined the effect of fiscal policy on the relationship between monetary policy and macroeconomic variables in Nigeria: An Empirical Investigation. The study employed a two-stage least square technique as estimation technique, where in the first step; the empirical models of fiscal and monetary policies were separately estimated. In the second step, the dependencies of each policy on the other are then included, to capture the effects of each on the other. Annual time series on the various monetary policy and fiscal policy variables from 1981 to 2020 were obtained from the Central Bank of Nigeria statistical bulletin. Augmented Dickey Fuller (ADF) test was used to examine the stochastic properties of the series. The findings revealed that Gross Domestic Product (GDP), inflation, and money supply are negatively related to monetary policy rate in Nigeria. Also, government expenditure limits the effectiveness of monetary policy in the management of both economic growth and inflation in Nigeria as the effect on inflation reduces from 0.06 to 0.02 and the effect on GDP changes from negative to positive. The study recommended that there should be an establishment of better consultation between both policies in order to secure high and sustainable fiscal and monetary policy mix and hence economic growth with price stability.