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The Impact of Monetary Policy and Its Lag on Economic Growth

Samuel Obafemi Dada and Kehinde Miracle Alabi

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Dada, S.O. and Alabi, K.M., 2021. The Impact of Monetary Policy and Its Lag on Economic Growth. United International Journal for Research & Technology (UIJRT), 2(8), pp.09-21.

Abstract

The study examined the impact of monetary policy and its lag on economic growth in United Kingdom, United States of America and Nigeria from 1986 to 2016. The comparative study used Gross domestic Product as the dependent variable and also used monetary policy rate, inflation rate, interest rate, money supply and exchange rate as independent variables. The study used the Generalized Method of Moments to examine the effect of lag, Auto Regressive Distributed Lag modeling approach for long run analysis coupled with the Engle Granger causality test to reveal the direction of causality. Hence, it was revealed that monetary policy lag has a negative effect on economic growth in the three countries. Also, monetary policy was found to exert an insignificant effect on economic growth in the United Kingdom and United State of America while monetary policy was found to exert a significant effect on economic growth in Nigeria through the channel of money supply. Meanwhile, the causality test revealed that economic growth causes monetary policy in USA and Nigeria while both phenomena dictate each other’s tune in the UK. Hence, it was recommended that policy makers should focus on reducing the existence of lags in the economy while monetary policy should not just be seen as a mere tool to display the tyranny of monetary authorities in Nigeria but should be adopted an effective tool of response to put the economy on track after a careful observation of the economy has shown that it is straying away from set targets and goals while the monetary policy should not be aggressively used as the market force mechanisms should be allowed to determine prices and phenomena within the economy. Also, monetary authorities should make use of money supply in sharply correcting the economy in Nigeria in case of any perceived deviation from set targets as this channel will bring about a substantial effect within the economy without so much delay to ensure that Nigeria catches up with other industrialized economy of the world.

Keywords: Monetary Policy, Economic Growth, Monetary Policy Lag, Generalized Method of Moments.

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