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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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