Conventional and unconventional monetary policy measures and economic growth in Nigeria

Abstract

This study investigates the impact of conventional and unconventional monetary policy measures on economic growth in Nigeria. Amidst persistent economic challenges exacerbated by the COVID-19 pandemic, understanding the effectiveness of monetary policy tools is crucial for policymakers. While traditional literature often focuses on conventional tools, this study fills a gap by examining both conventional measures like the Monetary Policy Rate and unconventional interventions such as Quantitative Easing (QE) and bailouts. Utilizing Vector Error Correction Models (VECM), the study analyzes long-run and short-run relationships between these measures and real GDP growth from 1990 to 2020. Findings reveal nuanced dynamics: while higher interest rates positively impact long-run growth, increased bailouts to subnational governments and real sector interventions by the Central Bank of Nigeria (CBN) have negative long-term effects, suggesting potential crowding-out effects and market distortions. Conversely, Quantitative Easing positively influences long-run growth, indicating its potential to stimulate aggregate demand. Short-run dynamics suggest a rapid self-correction mechanism within the system, but conflicting short-term impacts of policy measures necessitate further investigation. Policy recommendations emphasize the importance of balancing inflation control with growth promotion, evaluating the design and effectiveness of CBN interventions, and cautious management of unconventional policies like Quantitative Easing. These findings provide valuable insights for policymakers in Nigeria and other developing economies facing similar challenges.