EFFECTS OF FISCAL AND MONETARY POLICIES ON ECONOMIC GROWTH (1990-2017)
CHAPTER ONE
INTRODUCTION
1.1Background to the Study
The two major macroeconomic policies available anywhere in the world to achieve economic growth and sustainable development are monetary and fiscal policies. Nigeria is one of the countries whose primary macroeconomic policies are monetary and fiscal policy. One of the primary goals of monetary and fiscal policies in any economy is to achieve and sustain economic growth. This is paramount, not to mention the achievement of other macroeconomic variables such as employment generation (full employment), price stability, economic development, equity in the system (income redistribution), balance of payment (BOP), exchange rate stability, and increase in investment (Tchokote and Philemon, 2016).
Fiscal policy is the process by which a government adjusts its level of spending in order to monitor and control spending.
Influence the economy of a country. It is used in conjunction with monetary policy, which is used by the central bank to influence a country’s money supply. These two policies are used to achieve a country’s macroeconomic goals. These objectives include price stability, full employment, poverty reduction, high and sustainable economic growth, a favorable balance of payments, and debt reduction (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 changed whenever the government deems it necessary to suit the country’s economic climate. Because fiscal policy is goal oriented, it is usually geared towards achieving price stability, full employment, economic growth, and so on.
Income redistribution, a fixed and stable exchange rate, a favorable balance of payments, and assistance to friendly countries are all examples of good policies. Overall, fiscal policy is a tool for drawing resources from the private sector of the economy for use in the public sector.
Monetary policy is one of the macroeconomic tools used by nations to manage their economies. Monetary policy is regarded as an important aspect of macroeconomics because it deals with the use of monetary instruments to regulate the value, supply, and cost of money in an economy in accordance with the expected level of economic activity (Ubi, Lionel and Eyo, 2012). It encompasses a wide range of measures or packages designed to influence or regulate the volume, prices, and direction of money in the economy.
the economy per unit of time. It pervades all debonair efforts by monetary authorities to control the money supply and credit conditions in order to achieve various macroeconomic objectives. In Nigeria, the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance are in charge of monetary policy formulation (FMF).
In recent years, Nigeria’s monetary environment has been extremely volatile, leaving the economy vulnerable to shocks from volatile commodity prices. If the economy slows and employment falls, policymakers will be tempted to ease monetary policy in order to boost aggregate demand. When aggregate demand growth exceeds growth in the economy’s potential to produce, slack in the economy is absorbed and employment increases.
Return to a more sustainable course of action. In contrast, if the economy is overheating and inflationary pressures are building, the Central Bank will be inclined to counteract these pressures by tightening monetary policy to bring aggregate demand growth below that of the economy’s potential to produce for as long as necessary to defuse inflationary pressures and put the economy on a path to sustainable expansion (Anowor and Okorie, 2016).
While these policy options appear straightforward, fiscal and monetary policymakers frequently face significant uncertainties because the actual state of the economy and aggregate demand growth at any point in time is only partially known because key information on variables is only available with lags.
Policymakers are forced to rely on estimates of these economic variables when deciding on an appropriate policy, and thus may act on misleading information.
As a result, the purpose of this research is to investigate the interaction of fiscal and monetary policies as well as growth dynamics in Nigeria.
1.2 Statement of the Problem
Economic growth is one of the primary goals of Nigeria’s fiscal and monetary policies. Despite the implementation of fiscal and monetary policies, sustained economic growth and development are threatened by other macroeconomic trends such as unemployment, inflation, system inequality, deficit Balance of Payment (BOP), low rate of investment, and exchange rate volatility.
In this vein, Greenspan (2003) stated succinctly that “uncertainty is not just an important feature of the fiscal and monetary policies landscape; it is the defining feature of that landscape.” Within the Nigerian monetary environment, data “robustness,” data transmission mechanism, and fiscal environment are notably identified as her greatest challenge and uncertainty. This has become especially intriguing because the Nigerian external sector (balance of payment) is influenced by
Changes in net foreign assets and the government budget (net credit to the government) influence monetary policies just as much as real economic growth and prices.
The majority 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 in depth because they were theoretical studies whose findings were subjectively influenced by leading arguments in literature. It should be noted that previous studies did not pay sufficient attention to the existing relationship between fiscal policy, monetary policy, and economic growth in Nigeria, as well as highlighting effective strategies for stimulating real growth in Nigeria. As a result, it was on the discovery of this knowledge gap that This study was designed to critically examine Nigeria’s fiscal-monetary policy interaction and growth dynamics.
1.3 Objectives of the Study
The primary goal of this research is to evaluate Nigeria’s fiscal-monetary policy interaction and growth dynamics. Other specific goals include:
1. To investigate the impact of fiscal policy on Nigerian economic growth.
2. To investigate the impact of monetary policy on Nigerian economic growth.
3. Assess the degree of causality between key monetary and fiscal variables and economic growth.
1.4 Research Questions
The following research questions will be addressed by the study:
1. What effect does fiscal policy have on Nigerian economic growth?
2. How does monetary policy affect Nigerian economic growth?
3. How strong is the causal relationship between key monetary and fiscal variables and economic growth?
1.5 Research Hypotheses
The First Hypothesis
H0: Fiscal policy in Nigeria has no discernible impact on economic growth.
H1: Fiscal policy in Nigeria has a significant impact on economic growth.
Hypothesis No. 2
H0: Monetary policy in Nigeria has no significant impact on economic growth.
H1: Monetary policy has a significant impact on Nigerian economic growth.
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