APPROPRIATE MACROECONMIC POLICIES FOR …Asian Journal of Business and Economics Volume 4, No. 4.1...

Asian Journal of Business and Economics Volume 4, No. 4.1 Quarter I 2014 ISSN: 2231-3699

1

APPROPRIATE MACROECONMIC POLICIES FOR NIGERIA’S

ECONOMIC GROWTH, 1981-2010: AN ECONOMETRIC ANALYSIS

Steve S. Tombofa Associate Professor, Department of Economics, Niger Delta University, Nigeria Bodiseowei C. Obudah Lecturer, Department of Economics, Niger Delta University, Nigeria ABSTRACT

Policymakers in Nigeria are aware of the importance of sustained economic growth as

a macroeconomic policy. The paper is aimed at examining the effects of stabilization

policy instruments on economic growth. We used modern econometric techniques

and the empirical results based on annual data spanning the period 1981-2010.

Econometric results show that fiscal policy instrument had a negative impact on GDP

growth. CEF took a negative sign in all the three models. All monetary policy

variables except PRM had a positive impact on GDP growth. Nominal exchange rate

growth had a positive impact on growth except in model 1. All three models had a

good fit. This study recommends that expansionary fiscal policy measures be pursued

with caution not to worsen inflationary trend in the economy. A less volatile interest

rate regime would increase reliability and confidence of investors in the economy. It

is also relevant for monetary authorities and other players in the economy to

encourage economy wide international trade competitiveness so as to maintain

positive growth in exchange rate of the naira which will contribute to bringing about

the desired GDP growth in the Nigerian economy and other developing economies.

Key words: Growth, monetary policy, fiscal policy, exchange rate policy

JEL Classifications: C13, E52, E62, F43, O47


2

1. INTRODUCTION

Gross domestic product is a measure of economic activity. Over the years,

macroeconomic policies have been seen as important determinants of the level of

economic activity in a country. The dependent segments of the population neither

contribute to gross domestic product (GDP) nor national income. In addition, gross

domestic product does not cover household production. Also since the dependent

population does not earn income, why do we have income per capita rather than

income per contributing population? Keynes (1936) opined that the ideas of

economists and political philosophers are more powerful than is commonly

understood.

Economists have measured economic growth using change in nominal GDP, change

in real GDP, change in nominal GDP per capita and change in real GDP per capita.

According to the Central Bank of Nigeria (1995) economic growth is an increase in a

nation’s output of goods and services of various kinds as measured by the gross

domestic product. In de Melo, Denizer, and Gelb (1996, p. 403) growth is represented

by annual changes in real, officially measured GDP. The inward or outward shift in

the production possibility frontier is synonymous to economic growth. Then what is

the rationale for regarding a change in (real) GDP per capita as economic growth?

Concerning economic growth, Friedman (1968) argued that the basic forces of

enterprise, ingenuity, invention, hard work, and thrift are the true springs of economic

growth. This article has two objectives. The first objective is to examine the

association between each economic policy instrument and real economic growth. The

second objective is to examine the effects on real economic growth of monetary

policy, fiscal policy and exchange rate policy instruments. The next section deals with

economic growth as well as monetary, fiscal and exchange rate policies in Nigeria.

Section three is devoted to theoretical and empirical literature. Section four is for

data, methodology and estimation results. Conclusions and policy implications are in

section five.


3

2. ECONOMIC GROWTH AND ECONOMIC POLICIES IN NIGERIA

In order to improve the performance of the economic system, governments do

conduct macroeconomic policy. For achieving the objectives of macroeconomic

policy, some well-intentioned instruments used by the central government, viz.: (i)

monetary policy; (ii) fiscal policy; (iii) exchange rate policy; (iv) incomes policy; and

(v) trade policy. Monetary policy, fiscal policy and exchange rate policy are the main

stabilization policies used by central governments in developing and developed

countries. Keynes (1936) advocated the need for the national government to manage

aggregate demand using especially fiscal policy as well as monetary policy.

Sometimes, exchange rate policy is seen as part of monetary but it can also stand

alone.

2.1 Fiscal, Monetary and Exchange Rate Policies

Discretionary fiscal policy is a deliberate effort by the government to achieve not

only stable prices and full employment, but also economic growth, favourable income

distribution, and equilibrium in the balance of payments, through the appropriate

composition and size of its expenditure and tax revenue. Fiscal policy is essentially

the province of the central (national) government. In Nigeria, there are three tiers of

government (federal, state and local) with the Federal Ministry of Finance having the

responsibility for fiscal policy. Thus total government expenditure is the sum of the

expenditures of federal government, state governments and local governments.

Although each level of government collects specific revenues assigned to it, there is

also what is called federally collected revenue whereby some revenues are paid by

those who collect them into the Federation Account from where statutory allocations

are distributed monthly to the tiers of government.

At the discretion of the federal government in Nigeria is monetary policy which is

aimed at the nominal money supply, nominal interest rates, and credit availability.

The monetary authorities (Central Bank and Ministry of Finance) can and do

influence both the money supply, the interest rate and credit availability.


4

Today in Nigeria, the Central Bank of Nigeria is the monetary authority which issues

monetary policy and credit guidelines on an annual basis for the operation of the

financial system. Some of the policy targets are met while others are not. According

to Ajayi (1978, pp. 51-52) “The instruments of monetary policy will vary depending

on the economy in question. Even if one bears the special characteristics of an

economy in mind, this in no way guarantees that the choice of monetary policy

instrument can be made with ease.” Brunner (1961) argued that movements in a

monetary policy measure should solely reflect those actions undertaken through all

three of the Federal Reserve’s policy tools: open market operations, discount window

loans, and changes in reserve requirements. Over the years, monetary policy

instruments such as open market operations, cash reserve requirements and discount

window operations among others have been used for liquidity management of the

Nigerian economy. The CBN deliberately influences the cost of borrowing for private

sector investors by adjustments (either upwards or downwards) of the minimum

rediscount rate which was renamed the monetary policy rate in 2006 (equivalent to

the United States federal funds rate).

Exchange rate policy has a close link to the foreign exchange market which provides

a vital international link between national financial markets. The federal government

in Nigeria does not pay lip service to exchange rate in the foreign exchange market.

The Central Bank of Nigeria is responsible for Nigeria’s exchange rate policy. Thus

whenever necessary, the Bank gets involved in foreign exchange market intervention.

The main objectives of exchange rate policy in Nigeria are to preserve the

international value of the domestic currency, maintain a favourable external reserves

position, and ensure external balance (CBN, 1998). Over the years, the exchange rate

regimes in Nigeria have been fixed for some period and flexible for others (see

Osinubi and Amaghionyeodiwe, 2004 and Ubok-Udom 1999 for details).

Over the quinquennium 1981-1985, the nominal naira/dollar exchange rate was in the

range 0.6048 and 0.8924. The exchange rate increased to 1.2713 in 1986 and to 9.9 in


5

1991. However, it went beyond one digit in 1992 and to check the high exchange rate

in the “black” market the government decided to fix the exchange rate at 22 naira to

the US dollar. CBN (2006, p. 252) indicated that as at 2006, the rate was 128.65 naira

to the dollar. For 2007 and 2008, the nominal naira/dollar exchange rate stood at

127.71 and 121.90, respectively.

2.2 Economic Growth

Economic growth which can be real growth or nominal growth refers to the process

by which the economic output of an economy changes over time. The health of a

nation’s economy is based on the performance of the rates of economic growth over

time. According to the Central Bank of Nigeria (1995), although capital accumulation

is basic to economic growth, there are some other complementary factors like

favourable economic environment, improved technology, manpower development,

adequacy of infrastructure, security and political stability that are germane to

discussions on economic growth.

In Nigeria, real economic growth was negative for four straight years from 1981 to

1984. In 1985, real GDP growth rebounded to grow at 9.5 percent. However, the

growth rate became negative again in 1987. In the period 1981-1990, the real GDP

growth for Nigeria hovered between from -1.8 per cent in 1981 to 9.5 per cent in

1985. Since 1988, economic growth in Nigeria has been persistently positive.

However, the real GDP growth rates were very low in the period 1991-2002 which

the CBN (1995) attributed to low savings and investment ratios which are due

attributable to institutional factors and inappropriate macroeconomic policy

environment especially monetary, credit and exchange rate policies. The growth rates

were impressive during 2003-2008 and peaked at 9.6 per cent for the entire period.

Nigeria’s GDD grew at an average annual rate of 3.7 per cent in the 1981-2008

periods.


6

Nigeria’s National Economic Empowerment and Development Strategy (Nigeria

2004, p. 14) cited many factors inhibiting growth in Nigeria, including inconsistent

macroeconomic policy, instability and policy reversals, conflicts between different

macroeconomic policy goals, inadequate and decaying infrastructure, and volatility of

major macroeconomic aggregates, unsustainable public finance at all levels of

government, among others.

3. LITERATURE REVIEW

Capital accumulation (physical as well as human capital) plays a prominent role in

influencing a country’s economic growth. Others are a country’s economic and

political environment in terms of openness to foreign trade, political instability;

internal competitive structure and the efficiency of its government (see Gould and

Ruffin, 1993).

Fiscal policy has a role in the growth process. The larger the share of government

spending in gross domestic product, the lower is economic growth and investment

(see Barro 1990, 1991, 1996). Jones (1995a, 1995b) found little relationship between

policy variables and long-run growth. Genberg and Swoboda (1987) found the growth

rate of population (labour), real investment as a proportion of gross domestic product

(GDP), real government capital expenditures as a proportion of GDP, export growth

and real growth of the agricultural sector have a statistically significant positive effect

on economic growth. The study showed that an erratic monetary policy and total

government expenditures as a share of GDP are negatively related to economic

growth. Also that only total government expenditures as a proportion of GDP was not

statistically significant. Watchel (2003) found that the ratio of government

expenditure to GDP has a negative and significant effect on per capita GDP growth.

Also, Commander, Davoodi and Lee (1997) observed that government consumption

has a negative effect on growth.

In the economic literature, investment in general has a positive effect on economic

growth. According to DeLong and Summers (1991), equipment investment


7

(consisting of investments in machinery and equipment) has large effects on

economic growth.

Espinosa and Yip (1995) examined the growth impact of alternative fiscal and

monetary policies and that “when government spending is non-productive the growth

maximising financing is always pure rather than mix scheme” (p. 33). Also Espinosa

and Yip (1995, p. 34) found that when government expenditures are productive they

will be growth enhancing if such expenditures can be financed in a deflationary

fashion. Arguably, relatively infrequent but major changes in policy regimes, either

fiscal or monetary, may have important long-run effects on economic performance

(Balke 1991, p. 75)

Eugeni et al. (1992) selected the following levels of interest rates for investigation:

the federal funds rate, treasury constant bond rates, the 3 month euro dollar rate, the 6

month commercial paper rate, and the BAA corporate bond rate. Goodness-of-fit tests

show that all these interest rates are negatively correlated with real GDP, which

indicates that an increase in interest rates this period is associated with a decline in

real output (Eugeni, Evans and Strongin 1992). Akhtar and Harris (1986-87)

examined changes in interest effects on real economic activity and concluded that the

net effects of changes in interest rate in the economy have not declined.

Empirical results from Ajisafe and Folorunso (2002) showed that monetary rather

than fiscal policy exerts a great impact on economic activity in Nigeria. They further

asserted that emphasis on fiscal action of the government has led to greater distortion

in the Nigerian economy. In the same vein, Yakubu et al (2013) found that money

supply and government revenue have more positive impact on price and economic growth in

Nigeria specifically in the long run. This result corroborates Ajisafe and Folorunso (2002).

Udah (2009) studied the dynamic macroeconomic model of the Nigerian economy with

emphasis on the monetary sector and found that monetary variables and government


8

finance are linked through government’s net indebtedness to the banking system and

that the reduction in money supply would lead to a reduction in output. Akujuobi

(2010) also found that cash reserve ratio is significant in impacting on the economic

development of Nigeria at both 1% and 5% levels of significance, treasury bill at

5.6%, minimum rediscount rate at 7.4% and liquidity rate at 7.7%, while interest rate

was not significant at all. While studying the impact of monetary policy on the

Nigeria economy, Onyewu (2012) found that monetary policy presented by money

supply exerts a positive impact on GDP growth and balance of payment but had a

negative impact on rate of inflation. This study used the Ordinary Least Squares

Method (OLS) to analyse data between 1981 and 2008.

The present study seeks to overcome some of the drawbacks of previous studies by

using both growth accounting and national income accounting, stationary time series

and a simple growth model that captures four of the five macroeconomic policies that

are related to real economic growth. Fiscal policy, monetary policy, trade policy and

foreign exchange rate policy are “economic policies whose effects can be captured

through an aggregate production function of the economy” (Kydland and Zarazaga

1997, p. 32).

To be sure, classical economic growth theory has been overshadowed by the

neoclassical and new growth theories. “By the end of the 1960s, economists had a

fully worked out theory of economic growth …Since the mid-1980s, there has been a

new surge of interest in the theory of economic growth” (Begg et al., 2000, p. 511).

The academic growth literature now has competing views on growth—a neoclassical

theory and the recent endogenous (new) growth theory. The neoclassical economic

growth theories (or models) started with the Harrod-Domar Growth Model and the

Solow Growth Model with both models using the standard assumption that aggregate

output (Y) is produced using capital (K) and labour (L) as primary inputs.

The Harrod-Domar model assumed fixed factor coefficients, like capital-output ratio.

It also assumed that the capital-output ratio (k) equals K/Y and that the saving ratio(s)


9

is S/Y where S denotes saving. With K=I where I is investment and S=I the model

arrived at the fact that ΔY/Y = s/k where ΔY/Y denotes the rate of growth of gross

domestic product. According to the Harrod-Domar theory, the main obstacle to

growth is the relatively low level of new capital formation in developing countries.

Today, however, more attention is given to the neoclassical Solow growth model in

which technological progress is exogenous and output is produced using capital,

labour, and knowledge. Under the neoclassical assumptions of competitive factor

markets and input exhaustion when technology is Hick-neutral, output in the Solow

growth model (1957) is modelled as Y=A f (K, L) where A denotes the level of

technology and rate of Hick-neutral technical change equals total factor productivity.

The model assumes constant returns to scale production function and savings is a

fixed proportion of national income. The law of diminishing marginal returns is one

of the distinguishing elements of the Solow Model. The model asserts that capital

accumulation affects growth only during the transition to the steady state in which

output, capital and labour all grow at the same rate; long-term growth is determined

only by the rate of technical change. Moreover, the model assumes that long-term

growth is out of reach of policymakers. The standard neoclassical theory assumes that

knowledge is given and fixed.

The new growth theory created new interest in economic growth and the determinants

of technological progress and also the proper role of the central government in

education and development. The new growth theory has its focus on private

knowledge creation and characteristics of knowledge for the realization of unbounded

economic growth in a nation. The proponents of this theory include Paul Romer

(1990, 1987, 1986), Gene Grossman and Elhanan Helpman (1991), Lucas (1988),

Rebelo (1991) and Coe and Helpman (1995) to mention just a few. In the New

Growth Theory, that is, endogenous growth theory, physical capital (K), human

capital (H), labour (L) and technical knowledge (A) are treated as factor inputs in the

production of domestic economic output (Y). A is an input which is different from K,

H, and L. Whereas technical knowledge is considered “partially excludable” and


10

“non-rival”, the others, that is, physical capital, human capital and labour are

considered “fully excludeable” and “rival” in the production process.

4. DATA, METHODOLOGY AND ESTIMATION RESULTS

4.1 Data and Methodology

The effects of monetary, fiscal and exchange rate policies can be captured through an

economy-wide production function with constant returns to scale as well as the usual

neoclassical properties (see M nas-Anton 1987):

)1.....(..............................).........)()((),,( LHKALHKAfY

Where, Y denotes aggregate output, A denotes the level of technology (or state of

technology or level of multifactor productivity), K physical capital, H human capital,

and L labour. There are competitive markets in an competitive economy and based on

economic theory, the optimal quantity of each factor input is determined by

employing additional units till fi /pi= fj /pj, for i≠ j=1, 2, …n where fi =δf/δXi with pi

denoting the price of factor input and i and Xi denoting quantity of factor input i.

The logarithmic derivation of equation (1) yields:

)2........(..........ln)(lnlnlnln00000

LL

HH

KK

AA

YY ttttt

Equation (2) can simply be written as:

)3.......(..................................................ˆ)1(ˆˆˆˆ LHKAY

where the symbol ^ on top of a variable indicates a growth rate, α is the output

elasticity with respect to capital, β is the output elasticity of human capital and θ is

the output elasticity of labour. We also know from national income accounting that

there are aggregate final demand components with the identity

)4(..................................................).........( MXGICY

Where Y is national income (=economic output), C is personal consumption

expenditures, I is gross private domestic investment, G is government expenditures, X

is total exports, M is total imports, and net exports is X-M. From equation (4) we can

have Y , C , I , G , X and M .

Specifically equation (4) leads to (see Lederman et al. 2000):


11

)5.......(..........

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

t

t

t

t

t

t

t

t

t

t

t

t

t

t

t

t

MM

YM

XX

YX

YI

YI

GG

YG

CC

YC

YY

where 1

tYY is Y et cetera. Using equations (3) and (5) various determinants of

economic output growth (that is, economic policies) have been identified in the

economic literature concerning fiscal policy, monetary policy and exchange rate

policy.

According to economic theory, high interest rate has a negative effect on capital

accumulation and therefore curtails economic growth. We shall use three measures of

interest rate (prime lending rate, maximum lending rate, and monetary policy rate).

Government capital expenditure (measured by the share of federal government capital

expenditure in GDP) is included as an explanatory variable for investment and the

expectation is that the coefficient will be positive. “Changes in the money supply

initially affect the rate of interest. The consequent change in the rate of interest affects

aggregate economic activity” (Vane and Thompson 1985). On the basis of the

economic literature, we hypothesize that money supply growth and government

capital expenditure have a positive effect on growth.

It is universally agreed that a reasonable and sustainable growth in exports of goods

and services, ceteris paribus, enhances foreign exchange earnings and hence affects

the nominal exchange rate. Rising nominal exchange rate promotes investment which

would contribute positively to economic growth. So we expect the naira exchange

rate to have a positive effect on growth.

The dependent variable is real GDP growth (GRO). The independent variables are

fiscal policy instruments (FIS), monetary policy instruments (MON), exchange rate

policy instruments (EXC). Following Genberg and Swoboda (1985), M nas-Anton


12

(1987), and Tombofa (2008) the effects of fiscal, monetary and exchange rate policies

on real economic growth can be evaluated using a simple growth model of the form:

)6(........................................321 EXCMONFISGRO

where ε is a random error term. The error term is assumed to be independent of the

explanatory variables and normally distributed. Firstly, FIS which is expected to be

positively related to economic growth can be either PEX (the ratio of government

expenditures to the value of output) or CEF (the ratio of government capital

expenditures to the value of output). Secondly, MON which is expected to be

negatively and/or positively related to economic growth can be M2 money supply

growth (MG), or any of two measures of interest rate (prime lending rate of banks

(PRM), maximum lending rate (MAX) and minimum rediscount rate (MRR) which is

now known as monetary policy rate). Thirdly, GEXC is growth of nominal naira

exchange rate and is expected to be negatively related to economic growth.

Ganapolsky and Vilan (2005), Goldberg and Keitter (1997), Ubok-Udom (1999),

Hung (1992-93), and Campa and Goldberg (2002) used nominal exchange rate in

their studies.

The regression analyses will involve time series data covering 1981-2010 period for

real economic growth, money supply growth, prime lending rate, maximum lending

rate, minimum rediscount rate (monetary policy rate), government capital expenditure

as a share of GDP, and government expenditure as a share of GDP, and growth of

nominal naira exchange rate. The data used in this study were obtained from Central

Bank of Nigeria’s Statistical Bulletin (various years) and Annual Report and

Statement of Accounts (various years). CBN uses percentage change in real GDP at

factor cost (valued at constant prices) as a measure of economic growth. Money

supply growth is the percentage change in M2 money supply. Government

expenditure is a policy variable consisting of expenditure of all levels of government

(federal, state, local). The interest rate is the prime lending rate of money deposit

banks and maximum lending rate or minimum rediscount rate. When the nominal

interest rate is adjusted for expected changes in the price level it becomes real interest


13

rate. The real interest rate is defined by the Fisher equation in = ir + πe which can be

transformed to ir = in - πe where ir denotes real interest rate, in denotes nominal

interest rate and πe denotes expected inflation rate. Nevertheless, the Central Bank of

Nigeria does not publish real interest rate data and as such we do not intent to

calculate such for this study.

Correlation and multiple regression analyses were used to achieve the first and second

objectives. Specifically ordinary least squares regression technique from the EViews

econometric software package was used. The Gauss-Markov theorem provides the

theoretical justification for the popularity of the ordinary least squares. We investigate

the time series to test whether the relevant variables are integrated. Using the Phillips-

Perron test we can investigate the presence or absence of unit roots: the null

hypothesis states there is a unit root whereas, the research hypothesis states there is

no unit root (that is, stationary).

4.2 Regression Results and Discussion

The data for 30 observations used for the analyses are shown in the appendix. Table

1 depicts the outcome of the correlation analysis showing the relationship among the

variables. CEF and GEXC are negatively correlated with economic growth while all

others are positively correlated with growth. Also only the monetary policy variables

are significantly correlated to each other.

Table 2 presents Phillips-Perron tests for the presence of a unit root in the variables

(GRO, M2G, PRM, MRR, CEF, GEXC). The data series were all stationary at first

difference, that is, I(1) at the 5 per cent level of significance.


14

Table 1 Pearson Product Moment Correlation Coefficients

Source: Authors’ Computation from SPSS 16.0 Note: Pearson denotes Pearson correlation coefficient *. Correlation is significant at the 0.05 level (2-tailed). **. Correlation is significant at the 0.01 level (2-tailed). Table 2: Unit Roots Test results Panel 2A: Phillips-Perron Tests for Unit Roots at Levels Variable Phillips-Perron

Test Statistic MacKinnon Critical Value (5%)

Comment on Stationarity

GRO -3.344090 -2.9665 SL M2G -3.222865 -2.9665 SL CEF -3.837844 -2.9665 SL GEXC -5.155849 -2.9665 SL MRR -2.476113 -2.9665 NSL MAX -2.783788 -2.9665 NSL PRM -2.700413 -2.9665 NSL Source: Authors Computations using E-views Note: We used the E-Views econometric package. Critical value at 1 per cent is -3.6752. SL and NLS denote stationary and non-stationary at levels respectively.

Variables Pearson Sig. (2-tailed)

GRO M2G CEF GEXC MRR PRM MAX

GRO Pearson Correlation

1 .175 -.272 -.108 .167 .258 .303

Sig. (2-tailed) .355 .146 .570 .377 .169 .103 M2G Pearson

Correlation .175 1 -.071 -.213 .412* .524** .487**

Sig. (2-tailed) .355 .708 .259 .024 .003 .006 CEF Pearson

Correlation -.272 -.071 1 .116 .108 -.036 .083

Sig. (2-tailed) .146 .708 .543 .569 .849 .661 GEXC Pearson

Correlation -.108 -.213 .116 1 .008 -.016 -.106

Sig. (2-tailed) .570 .259 .543 .965 .932 .577 MRR Pearson

Correlation .167 .412* .108 .008 1 .831** .808**

Sig. (2-tailed) .377 .024 .569 .965 .000 .000 PRM Pearson

Correlation .258 .524** -.036 -.016 .831** 1 .915**

Sig. (2-tailed) .169 .003 .849 .932 .000 .000 MAX Pearson

Correlation .303 .487** .083 -.106 .808** .915** 1

Sig. (2-tailed) .103 .006 .661 .577 .000 .000


15

Panel 2B: Phillips-Perron Tests for Unit Roots at First Difference Variable Phillips-Perron

Test Statistic MacKinnon Critical Value (5%)

Comment on Stationarity

GRO -7.439452 -2.9705 I(1) M2G -6.062958 -2.9705 I(1) CEF -8.217485 -2.9705 I(1) GEXC -11.32199 -2.9705 I(1) MRR -7.113014 -2.9705 I(1) MAX -6.979303 -2.9705 I(1) PRM -6.281984 -2.9705 I(1) Source: Authors Computations using E-views Note: We used the E-Views econometric package. Critical value at 1 per cent is -3.6852. SL and NLS denote stationary and non-stationary at levels respectively.

Unit root test results show that GRO, M2G, CEF and GEXC are integrated at order

zero, i.e. stationary at levels. This is denoted in Panel A. Panel B shows that MRR,

MAX and PRM are non-stationary at levels, i.e. I(1) series.

Table 3: Johansen’s Co-integration Test Results

Panel 3A: Johansen’s Co-integration Test Results for model 1 Series: GRO(-1) CEF M2G GEXC Lags interval: 1 to 1 Hypothesized No. of CE(s)

Eigen Value

Likelihood Ratio

5 Percent Critical Value


None * 0.650580 48.22004 47.21 54.46 At most 1 0.303075 19.83003 29.68 35.65 At most 2 0.236360 10.08096 15.41 20.04 At most 3 0.098513 2.800174 3.76 6.65

Source: Authors Computations using E-views *(**) denotes rejection of the hypothesis at 5%(1%) significance level L.R. test indicates 1 cointegrating equation(s) at 5% significance level

Panel 3B: Johansen’s Co-integration Test Results for model 2 Series: CEF GEXC GRO(-1) MAX(-1) PRM(-1) Lags interval: 1 to 2 Hypothesized No. of CE(s)

Eigen Value

Likelihood Ratio



None ** 0.764068 85.63235 68.52 76.07 At most 1 * 0.587957 48.08282 47.21 54.46 At most 2 0.323556 25.03052 29.68 35.65 At most 3 0.307777 14.86696 15.41 20.04 At most 4 * 0.184504 5.302926 3.76 6.65 Source: Authors Computations using E-views *(**) denotes rejection of the hypothesis at 5%(1%) significance level


16

L.R. test indicates 2 cointegrating equation(s) at 5% significance level Panel 3C: Johansen’s Co-integration Test Results for model 3 Series: GRO(-1) CEF GEXC MRR(-1) Lags interval: 1 to 3 Hypothesized No. of CE(s)

Eigen Value

Likelihood Ratio



None ** 0.977241 143.1979 47.21 54.46 At most 1 ** 0.759391 48.62801 29.68 35.65 At most 2 0.389734 13.01347 15.41 20.04 At most 3 0.026325 0.666944 3.76 6.65 Source: Authors Computations using E-views *(**) denotes rejection of the hypothesis at 5%(1%) significance level L.R. test indicates 2 co-integrating equation(s) at 5% significance level

The Johansen’s co-integration test results for GRO, CEF, M2G and GEXC series

show one co-integrating equation at the 5 per cent level of significance. On the other

hand, models 2 and 3 have two co-integrating equations hence, the variables move to

equilibrium in the long run for each model. The short-run disequilibrium for a static

time series can be corrected using the error correction mechanism. ECM is conducted

in the existence of at least one co-integrating equations.

Table 4: Multivariate Regression Results

Dependent Variable: Real Economic Growth (GRO) Variable Model 1 Model 2 Model 3

Constant 13.47359 18.21358 9.671249

M2G 0.047770 - -

CEF -0.585777 -0.708507 -0.563565

GEXC -0.023239 0.007125 0.012469

PRM - -0.247182 -

MAX - 0.171581 -

MRR - - 0.081206

ECM(-1) -0.040493 -0.123595 -0.218417

R2 0.882027 0.891707 0.832382

Adjusted R2 0.764055 0.702195 0.571644

F 7.476540 4.705271 3.192405

Std Error 1.289658 1.345737 1.759196

D-W statistic 2.441597 2.598261 2.220087

Source: Authors’ computation using E-views


17

Estimation using OLS multiple regression analyses provided the results in Table 4.

For the empirical results in Model 1, the explanatory variables explained about 76 per

cent of the variation in economic growth as against 70 per cent from the results in

Model 2. In addition, the adjusted coefficient of determination was better in Model 1

when compared to that in Model 2. The regression results in Model 3 show that the

explanatory variables explain 57 per cent of the variation in real economic growth.

This implies that models 1, 2 and 3 had a good fit. We considered the null hypothesis

that coefficients of the independent variables are jointly equal to zero for Model 3.

Under the null hypothesis that the coefficients are jointly equal to zero, the F statistic

is greater than the critical value at the 5 percent significance level. Monetary policy

instruments such as maximum lending rate (MAX) and minimum rediscount rate

(MRR) have a clear positive effect on the growth rate. Only prime lending rate of

banks (PRM) has a negative effect on growth rate. A critical analysis of prime

lending rate of banks in Nigeria reveals that it is always higher than ideal situations.

From economic theory, higher interest rates have a negative relationship with

investment and in turn economic growth. In the same vein, the proportion of capital

expenditure of the federal government in GDP has a clear negative effect on the

growth rate. In Nigeria the level of capital budget implementation has been low over

the years. This relatively suggests the negative impact of public capital expenditure to

economic growth.

The D-W statistic results for models 1, 2 and 3 show the absence of serial correlation

and the F-ratio (prob.) show that at the chosen 5 per cent level of significance, all

three models were significant. Parsimonious ECM results show that model 1, 2 and 3

took the expected sign. The speed of adjustment towards equilibrium for each period

for model 1 was estimated at 4 percent. The speed of adjustment for models 2 and 3

were estimated to be 12 and 22 percent respectively.


18

CONCLUSIONS AND IMPLICATIONS

The Pearson correlation coefficient between each policy instrument and economic

growth was very low and only one was significant at the 1 per cent level. The

economic models estimated in this paper did not yield statistically significant

coefficients at the 5 percent level of significance. Econometric results show that fiscal

policy instrument had a negative impact on GDP growth. CEF took a negative sign in

all the three models. Actual capital expenditure in Nigeria appears to be very low in

comparison with budgetary provisions and recurrent expenditure. This suggests the

negative impact of CEF on GDP growth. All monetary policy variables except PRM

had a positive impact on GDP growth. Nominal exchange rate growth had a positive

impact on growth except in model 1. Appreciating nominal exchange rate dampens

GDP growth in the long run all things being equal. This study recommends that

expansionary fiscal policy measures be pursued with caution not to worsen

inflationary trend in the economy. A less volatile interest rate regime would increase

reliability and confidence of investors in the economy. It is also relevant for monetary

authorities and other players in the economy to encourage economy wide

international trade competitiveness so as to maintain growth in exchange rate of the

naira which will contribute to bringing about the desired GDP growth in the Nigerian

economy and other developing economies.


19

REFERENCES

AJAYI, S. I. (1978). Money in a Developing Economy: A Portfolio Approach to Money Supply Determination in Nigeria, Ibadan: Ibadan University Press. AJISAFE, R. A. and B. A. FOLORUNSO (2002). The Relevant Effectiveness of Fiscal Policy and Monetary Policy in Macroeconomic Management in Nigeria, The African Economic & Business Review, Vol. 3, No. 1, pp. 23-40. AKHTAR, M. A., and ELTHAN S. HARRIS. (1986-87). Monetary Policy Influence on the Economy: An Empirical Analysis. Federal Reserve Bank of New York Quarterly Review, Vol. 11, No. 4. AKUJUOBI, L. E., (2010). Monetary Policy and Nigeria’s Economic Development; African Research Review, Vol. 4, No. 4, pp. 153-161. BALKE, NATHAN S. (1991) “Modeling Trends in Macroeconomic Time Series.” Federal Reserve Bank of Dallas Economic Review, May : 71-75. BARRO, R. J. (1996). Democracy and Growth. Journal of Economic Growth, Vol. 1, No. 1: 1-27. BARRO, R. J. (1991). Economic Growth in a Cross-Section of Countries. Quarterly Journal of Economics, Vol. 106, No. 2: 407-43. BARRO, R. J. (1990). Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy, Vol. 98, No. 5 (Part 2): S103-25. BEGG, DAVID, FISCHER, STANLEY AND DORNBUSCH, RUDIGER. (2000). Economics, Sixth edition, London: McGraw-Hill. BRUNNER, KARL. (1961). A Schema for the Supply Theory of Money. International Economic Review, Vol. 2: 79-109. CAMPA, JOSE M., AND LINDA GOLDBERG (2002), Exchange Rate Paa-Through Into Import prices: A Macro and Micro Phenomenon? National Bureau Working Paper No. 8934, May. CENTRAL BANK OF NIGERIA. (Various years). Annual Report and Statement of Accounts, Abuja: CBN. COE, D. T., and HELPMAN, E. (1995). International R&D Spillover. European Economic Review, Vol. 39: 859-87.


20

COMMANDER, SIMEON, DAVOODI, HAMID and LEE, UNE. (1997). The Causes of Government and the Consequences for Growth and Well-being. Policy Research Working Paper 1785, Washington, D. C.: World Bank. DELONG, J. B., AND L. H. SUMMERS, L. H. (1991). Equipment Investment and Economic Growth. Quarterly Journal of Economics, Vol. 106: 445-502. De MILO, MARTHA, CEVDET DENIZER, AND ALAN GELB. 1996. “Patterns of transition from Plans to Market.” The World Bank Economic Review Vol. 10, No. 3, pp. 397-424. ESPINOSA, M. A., and YIP, C. K. (1995). Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries. Federal Reserve Bank of Atlanta, Working Paper 95-10, November. EUGENI, F., EVANS, C., and STRONGIN, S. (1992). Making Sense of Economic Indicators: A Consumer’s Guide to Indicators of Real Economic Activity. Federal Reserve Bank of Chicago Economic Perspective, Vol. XVL, No. 5: 1-31. FRIEDMAN, M. (1968). The Role of Monetary Policy. American Economic Review, Vol. 58: 1-17. GERBERG, H., AND SWOBODA, A. K. (1987). The Medium-Term Relationship Between Performance Indicators and Policy: A Cross-Section Approach. The World Bank Report No. EPD-01. GANAPOLSKY, EDUARDO J. J., and DIEGO VILAN. (2005). “Buy Foreign While You Can: The Cheap Dollar and Exchange Rate Pass-Through.” Federal Reserve Bank of Atlanta, Economic Review, Third Quarter: 15-36. GOLDBERG, PINELOPI K., and MICHAEL M. KNETTER. (1997). ‘Goods Prices and Exchange Rates: What have We Learned?” Journal of Economic Literature, Vol. 35, No. 3: 1243-72. GOULD, D. M., and RUFFIN, R. J. (1993). ‘What Determines Economic Growth?’ Federal Reserve Bank of Dallas Economic Review, Second Quarter: 25-40. GROSSMAN, G. M., and HELPMAN, E. (1991). Innovation and Growth in the Global Economy. Cambridge, Mass.: MIT Press. HASLAG, J. H., and OZMENT, D’ ANN M. (1991). Money Growth, Supply Shocks, and Inflation. Federal Reserve Bank of Dallas Economic Review, May: 1-17. HUNG, JUAN. (1992-93), Assessing the Exchange Rate’s Impact on U. S. Manufacturing Profits. FRB of New York Quarterly Review, Vol. 17: 44-63.


21

JONES, C. I. (1995a). R&D Based Models of Economic Growth. Journal of Political Economy, Vol. 103: 759-84. JONES, C. I. (1995b). Time Series of Endogenous Growth Models. Quarterly Journal of Economics, Vol. 110: 495-525. KEYNES, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan. KYDLAND, FINN E., and CARLOS E. J. M. ZARAZAGA (1997). Is the business cycle of Argentina “different”. Federal Reserve Bank of Dallas Economic Review, Fourth Quarter: 21-36. LEVINE, R., AND RENELT, D. (1992). A Sensitivity Analysis of Cross-Country Growth Regressions. American Economic Review, Vol. 82: 942-63. LUCAS, R. E., Jnr. (1988). On the Mechanics of Economic Development. Journal of Monetary Economics, Vol. 22: 3-42. MANAS-ANTON, L. A. (1987). ‘Relationship Between Income Tax Ratios and Growth Rates in Developing Countries,’ in VED P. GANDHI, (ed), Supply-Side Tax Policy: Its Relevance to Developing Countries, Washington, D. C.: International Monetary Fund. NIGERIA (2004): National Economic Empowerment and Development Strategy, Abuja: National Planning Commission. Reprint by Central Bank of Nigeria, Abuja, 2005. ONYEIWU, Charles (2010). Monetary Policy and Economic Growth of Nigeria, Journal of Economic and Sustainable Development, Vol. 3, No. 7, pp. 62-70. OSINUBI, T.S., and AMAGHIONYEODIWE, L. A. (2004), ‘What Determines the Choice of Exchange Rate Regimes in Nigeria”, Union Digest, Vol. 8: 82-103. REBELO, SERGIO. (1991). ‘Long-Run Policy and Long-Run Growth.’ Journal of Political Economy, Vol. 99: 500-21. ROMER, P. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, Vol. 94: 1002-37. ROMER, P. (1987). New Theories of Economic Growth,’ American Economic Review, Vol. 77, May, Papers and Proceedings: 56-62


22

ROMER, P. (1990). Endogenous Technical Change. Journal Political Economy, Vol. 98, No. 5, part 2, S87-S102. STIGLITZ, J. E. (1996): “Some Lessons from the East Asia Miracle.” World Bank Research Observer, Vol. 11, No. 2: 151-177. TOMBOFA, S. S. (2008). The Effects of Fiscal and Monetary Stabilization Policies on Nigeria’s Economic Growth. Niger Delta Economic Review, Vol. 4, No. 1: 33-49. UBOK-UDOM, E. U. (1999), “Currency Depreciation and Domestic Output Growth in Nigeria, 1971-75’, Nigerian Journal of Economic and Social Studies, Vol. 41, No. 11: 31-44. UDAH, E. B. (2009). A Dynamic Macroeconomic Model of the Nigerian Economy with Emphasis on the Monetary Sector, SAJEMS, Vol. 12, No. 1, pp. 28-47. VANE, H. R., AND J. L. THOMPSON. 1985. An Introduction to Macroeconomic Policy. Brighton, Sussex: Wheatsheaf. WACHTEL, PAUL. 2003. “How Much Do We Really Know about Growth and Finance?” FRB of Atlanta Economic Review, First Quarter: 33-47. YAKUBU, M., K. A. BARFOUR and S. U. GULUMBE (2003). Effect of Monetary-Fiscal Policies Interaction in Price and Output Growth in Nigeria, CBN Journal of Applied Statistics, Vol. 4, No. 1, pp. 55-74.

APPROPRIATE MACROECONMIC POLICIES FOR …Asian Journal of Business and Economics Volume 4, No. 4.1...

Documents

Transcript of APPROPRIATE MACROECONMIC POLICIES FOR …Asian Journal of Business and Economics Volume 4, No. 4.1...