Long and Short Run Relationship Analysis of Monetary and Fiscal Policy on Economic Growth in Nigeria: A VEC Model Approach

Abstract

This study investigates and measures the long and short run relationship of monetary and fiscal policies on economic growth in Nigeria. A Vector Error Correction (VEC) models technique was employed to analyse and draw policy inferences. Through the VEC model, the relationships then have been investigated by the long-run relationships in the cointegrating vector and the short-run effects from the VEC model. From the cointegration analysis, the long-run relationships give some possible indications of growth in Nigerian economy. We find that the Nigerian economy is determined mostly by money supply. It is clear also from the findings those monetary policy variables: money supply and minimum rediscount rate have dominant long-run effects on the economy. From these results it is clear that monetary policy exacted greater impact on the economic growth but the effects of fiscal policy had lower magnitude more specifically when there is decrease in the inflation rate. Additionally, the 35% speed of adjustment to the short run disequilibrium shows an improvement in the Nigeria economic growth. Although, both monetary and fiscal policy variables may contribute to economic growth in the short and long term, but based on these findings monetary policy will exact more impact if it facilitates the supply side of the economy through money supply.

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