ABSTRACT

The role of monetary policy in sustaining economic growth has been a highly researched subject. The aim of this study is to examine the relationship between monetary policy and economic growth in which the past studies have shown conflicting results in Nigeria. Quarterly time series data was collected from the Central Bank of Nigeria Statistical Bulletin and Website from 1981 to 2021. Motivated by the prevalence of misleading inference in time series occasioned by failure to account for structural breaks in series as volatile as macroeconomic variables in Nigerian specific studies, this study sought to find out whether structural breaks matter in studying the response of Economic growth to monetary policy shocks. The study employed Zivot-Andrews unit root test with structural break to compare the unit root result with the conventional ADF result while the Autoregressive Distributed Lag (ARDL) bounds testing approach is used to investigate the co-integration among the variables in the presence of structural breaks. Also the impulse response function (IRF) was employed to determine the response of Economic Growth to monetary policy shocks in Nigeria from 1981 to 2021. The unit root test shows that failure to account for structural break in unit root of a volatile series can produce wrong inference. After allowing for structural breaks, the study finds no evidence of co-integration relationship between economic growth and monetary policy. Thus it can be argued that there exists only a short run relationship between the variables of study. The estimates of the ARDL short run model suggest that Money Supply (M2) has a significant positive impact on economic growth in the short run at the selected lag length. However, the estimates show that Net Credit to Government (NCG) has a negative significant impact on economic growth in Nigeria. More also, Exchange Rate (EXR), Inflation (INFL) and Maximum Lending Rate (MLRC) have a positive but insignificant effect on Economic Growth in the short run. The Impulse response function (IRF) results suggested that Economic Growth responds negatively to money supply (M2) and Net credit to Government (NCG) shocks. More also the result shows that Economic growth respond positively to Exchange rate (EXR) shocks. Furthermore, the Impulse Response results show that Inflation (INFL) and Maximum Lending Rate (MLRC) possessed no impact on economic growth as their shocks quickly dies or converges back to zero. Therefore this study makes the following recommendations for policy makers and future researchers in Nigeria: the policy makers in Nigeria should increase the level of broad money supply in the country since broad money supply lead to economic growth in the short run. Also the Apex bank in Nigeria should embark on the use of appropriate monetary policy variables that will address non-performance of Exchange rate and maximum lending rate in contributing to the nation’s economic growth.