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EFFECTS OF FISCAL AND MONETARY POLICIES ON ECONOMIC GROWTH (1990-2017)

CHAPTER ONE

INTRODUCTION

1.1Background to the Study

Monetary and Fiscal policies are the two major macroeconomic policies obtainable anywhere in the globe to achieve economic growth and sustainable development. Nigeria is not an exception of the countries whose major macroeconomic policies are monetary and Fiscal policy. One of the major objectives of monetary and fiscal policies in any economy is the achievement and maintenance of economic growth. The achievement of this is paramount not excluding achievement of other macroeconomic variables like; employment generation (full employment), price stability, attainment of economic development, equity in the system (income redistribution), achievement of balance of payment (BOP), exchange rate stability and increment in investment (Tchokote and Philemon, 2016). Fiscal policy is the means by which a government adjusts its level of spending in order tomonitor and influence a nation’s economy. It is used along with the monetary policy which thecentral bank uses to influence money supply in a nation. These two policies are used to achievemacroeconomic goals in a nation. These goals include price stability, full employment, reductionof poverty levels, high and sustainable economic growth, favourable balance of payment, and reduction in a nation’s debt (Agu, Idike, Okwor and Ugwunta, 2014).

According to Ogar, Nkamare and Emori (2014) fiscal policy is a built-in stabilizer in the sense that taxes and government expenditure can be varied at any time the government deems it necessary, so as to suit the economic climate of the country since fiscal policy is goal oriented, it is usually geared towards achieving price stability, full employment, economic growth, income redistribution, fixed and stable exchange rate, favorable balance of payment and aid to friendly countries. On the whole, fiscal policy is an instrument for drawing resources from the private sector of the economy for public sector used. Monetary policy is one of the macroeconomic instruments with which nations use to manage their economies. Monetary policy is seen as an important aspect of the macroeconomics which deals with the use of monetary instruments designed to regulate the value, supply and cost of money in an economy, in line with the expected level of economic activity (Ubi, Lionel and Eyo, 2012). It covers the gamut of measures or combination of packages intended to influence or regulate the volume, prices as well as direction of money in the economy per unit of time. Specifically, it permeates all the debonair efforts by the monetary authorities to control the money supply and credits conditions for the purpose of achieving diverse macroeconomic objectives. In Nigeria, the responsibility for monetary policy formulation rests with the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF).

The monetary environment in Nigeria has been very unstable in the recent past, with the economy being vulnerable to shocks from volatile commodity prices. If the economy slows and employment declines, policy makers will be inclined to soften monetary policy to stimulate aggregate demand. When growth in aggregate demand is boosted above growth in the economy's potential to produce, slack in the economy will be absorbed and employment will return to a more sustainable path. In contrast, if the economy is showing signs of overheating and inflation pressures are building, the Central Bank will be inclined to counter these pressures by tightening the economy through monetary policy to bring growth in aggregate demand below that of the economy's potential to produce for as long as necessary to defuse the inflationary pressures and put the economy on a path to sustainable expansion (Anowor and Okorie, 2016). While these policy choices seem reasonably straightforward, fiscal and monetary policies makers routinely face certain notable uncertainties because the actual position of the economy and growth in aggregate demand at any point in time is only partially known as key information on variables only come with lags such that policy makers are constraint to rely on estimates of these economic variables when assessing the choice of appropriate policy and therefore could act on the basis of misleading information. Hence, this study seeks to examine fiscal-monetary policy interaction and growth dynamics in Nigeria.

1.2    Statement of the Problem

One of the major objectives of fiscal and monetary policies in Nigeria is to achieve economic growth. Despite the adoption of fiscal and monetary policies, sustainable economic growth and development associated with other macroeconomic trends of unemployment, inflation, system inequality, deficit Balance of Payment (BOP), low rate of investment, exchange rate instability still pose threat to Nigeria’s economic growth. In this vein, Greenspan (2003) observed succinctly that “uncertainty is not just an important feature of the fiscal and monetary policies landscape; it is the defining characteristic of that landscape” within the Nigerian monetary environment, data “robousity”; data transmission mechanism and fiscal environment are notably found as her greatest challenge and uncertainty. This has become particularly interesting because the Nigerian external sector (balance of payment) via change in net foreign assets; government budget (net credit to government) influence monetary policies as much as the real growth of the economy and prices.

Most of the available studies on fiscal and monetary policies in Nigeria by Celina (2014), Morakinyo, David and Alao (2018), Usman and Adejare (2014), Adigwe, Echekoba, Justus and Onyeagba (2015) were not depth in investigation since they were theoretical studies whose findings were subjectively influenced by leading argument in literature. It is noted that available past studies did not give adequate attention to the subsisting relationship between fiscal policy, monetary policy and economic growth in Nigeria, as well as highlighting effective strategies for stimulating real growth in Nigeria. Hence, it was on the identification of this gap in knowledge that this study was conceived to critically examine fiscal-monetary policy interaction and growth dynamics in Nigeria.

1.3    Objectives of the Study

The major objective of this research study is to assess fiscal-monetary policy interaction and growth dynamics in Nigeria. Other specific objectives are:

1.  To examine the effect of fiscal policy on economic growth in Nigeria.

2. To investigate the impact of monetary policy on economic growth in Nigeria.

3. To evaluate the degree of causal relation between the key monetary and fiscal variables and economic growth.  

1.4    Research Questions

The study intends to answer the following research questions:

1. What is the effect of fiscal policy on economic growth in Nigeria?

2. How does monetary policy impact on economic growth in Nigeria?

3. What is the degree of causal relation between the key monetary and fiscal variables and economic growth?

1.5    Research Hypotheses

Hypothesis One

H0: Fiscal policy has no significant effect on economic growth in Nigeria.

H1: Fiscal policy has a significant effect on economic growth in Nigeria.

Hypothesis Two

H0: Monetary policy does not have a significant impact on economic growth in Nigeria.

H1: Monetary policy has a significant impact on economic growth in Nigeria.

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