Monetary Development and Effects on Economic Growth in Nigeria: An Econometric Investigation Using Vector Autoregression Modeling

Abstract

The paper analyses monetary development and effects on economic growth in Nigeria for the period 1970-2008. The time series data used for the work were extracted from the central bank of Nigeria’s statistical bulletin. The ultimate objective of the study is to determine the interdependency or directional causation of monetary development and economic growth in a developing economy like Nigeria. The econometric method of vector autoregression techniques was used for the estimation. Specifically, the forecast error variance decompositions and impulse response functions are used to determine whether or not shocks in monetary development impact on economic growth in Nigeria. The results from the estimated forecast error variance decomposition and impulse response analyses show that the variability in economic growth in Nigeria is mostly caused by monetary development indicators such as the ratio of loans and advance to nominal gross domestic product. (LA/Y) and the ratio of total financial asset of banks to nominal gross domestic product (FA/Y) Though a bidirectional impact was also noticed but economic growth response more to shocks in monetary development them the other way round in Nigeria. The study finds evidence to support LA/Y and FA/Y targeting as an alternative policy instrument to achieved greater and sustainable economic growth in Nigeria