Annals of Humanities and Development Studies

Log in or Register to get access to full text downloads.

Remember me or Register

DOWNLOAD FULL TEXT Open Access  DOWNLOAD FULL TEXT Subscription or Fee Access

The Relative Effectiveness of Monetary and Fiscal Policies in Economic Stabilization in a Developing Economy: An Empirical Evidence From Nigeria

II Iyeli, EB Uda, E Akpan


This study investigates econometrically, the relative effectiveness of Monetary and Fiscal policies, by focusing on the relative effectiveness of Broad Money Supply and Government Fiscal Deficits with respect to their influences on economic activity represented by the Gross Domestic Product (GDP). The ultimate research objective centers on an empirical investigation of which policy tool has greater, more predictable and faster effect on output growth. In order to achieve the objective, we propose and specify the model with parameters, which consist of a two-equation system. The Domestic Price Inflation taken as a proxy for price stabilization policy and the output stabilization function. These two equations were estimated and used to test the hypothesis on the relative effectiveness of monetary vis-à-vis fiscal policy. The model was an adaptation and subsequent modification of the St. Louis model of the Federal Reserve Bank of USA by Anderson and Jordan 1978. The econometric method of cointegration and error-correction modeling is applied to establish the extent of the quantitative impact and relative significance of the variables were investigated by conducting a unit root/non-stationarity test using annual  time series data from CBN Statistical Bulletin and Annual Reports, for the period 1970 through 2001. The results of the study confirm that of Bogunjoko (1997) that the contemporaneous contribution of Broad Money Supply (MS2) to the inflationary cycle in Nigeria is weak, but its one year lagged value is strong, positive and significant. The effects of Money Supply factors on inflation in Nigeria appear dominant, while the role of Fiscal Deficit is pervasive. Also the study confirmed that the role of fiscal policy (especially Fiscal Deficits) although positive, is negligible and in some instances statistically insignificant in influencing cyclical inflation rate in Nigeria within the period under review. Our output model confirms that money matters in Nigeria and that the appropriate monetary target is the Broad Money Supply. The effect of monetary policy on output growth has an edge over fiscal policy variable as a measure of output stabilization. The fiscal policy factor, although statistically insignificant, also has a negative association with the domestic output factor. Therefore fiscal policy efforts of the Federal Government of Nigeria are not positive in stimulating output growth. It is interesting to note that the coefficients of the error  correction mechanism capture the short-run impact, which is tied to the long-run relationship between the cointegrating variable through the feedback mechanism. In most instances, the coefficient shows a slow feedback mechanism. The results shed some light on the objectives of the study. Finally, in line with our results, appropriate policy recommendations were proffers to enhance the stabilization efforts of the Nigerian Government.

AJOL African Journals Online