Examining the Relative Effectiveness of Monetary and Fiscal Policies in Nigeria: A Cointegration and Error Correction Approach

Abstract

This study examines the relative effectiveness of monetary and fiscal policies in Nigeria within the period 1981 to 2009. Using quarterly data sourced from the Central Bank of Nigeria and employing the cointegration and error correction methodology, the study finds a significant positive relationship between contemporaneous values of RGDP and GOVEXP and a positive relationship between RGDP and one-quarter lagged value of money supply. Thus, while fiscal policy action in current quarter was observed to impact positively on economic activities in the current quarter, the impact of monetary policy action was delayed till the next quarter. The paper however finds that the positive impact of monetary policy action on economic activities was more significant than that of fiscal policy within the period covered by the study. The paper concludes that both policies should be seen as complementary demand management policies and each should be implemented in economic situations for which they are best suited.

Keywords: Monetary Policy, Fiscal Policy, Economic Growth

JEL Classification: E52, E62