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This study investigates the relative impact of money supply and government expenditure on economic growth in Nigeria. In order to achieve the objectives, we proposed and specified models with parameters, which were estimated and used to test the hypothesis on relative impact of money supply vis-à-vis government expenditure. The Beta Coefficients techniques were employed to analyze the data. The empirical result showed that the impact government expenditure are relatively more effective compared with money supply on economic activities. That government expenditure impact more significantly and stably on economic activities than money supply. During the economic/financial meltdown, it is of note that government expenditure also impact more significantly than money supply in stabilizing economic activity and aggregate output (GDP). The emphasis on fiscal action of the government has led to greater distortion in the Nigerian economy. The role of fiscal policy can be more effective for enhancing economic growth by eliminating corruption, leakages of resources and inappropriate use of resources. However, the combination and harmonization of both money supply and government expenditure are highly recommended.
Title Page i
Table of Contents vi-viii
List of Tables ix
CHAPTER ONE: INTRODUCTION
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Issues 20
2.2 Review of Theoretical Literature 26
2.3 Empirical Literature 35
2.4 Theoretical Framework. 48
CHAPTER THREE: METHODOLOGY
3.1 Research Methodology 53
3.2 Sources of Data 54
3.3 Model Specification 54
3.4 Estimation and Evaluation Procedures 56
CHAPTER FOUR: EMPIRICAL ANALYSIS
4.1 Data Analysis 58
4.2 Presentation of Results 59
4.3 Hypothesis Testing 61
4.4 Interpretation of Results 63
4.5 Policy Implications of Findings. 69
CHAPTER FIVE: SUMMARY, CONCLUSION AND
5.1 Summary of Major Findings 73
5.2 Conclusion 76
5.3 Policy Recommendations 77
5.4 Limitations and Suggestions for Future Studies. 79
Macroeconomic policy management in Nigeria is dominated by monetary and fiscal policies. Other policies include income, prices, employment, trade, industrial etc. Money supply and government expenditure are two cardinal tools of monetary and fiscal policies respectively. Generally, both monetary and fiscal policies seek to achieve relative macroeconomic stability. The objectives of monetary and fiscal policies in Nigeria are wide-ranging. These include increase in gross domestic product (sustainable growth ), reduction in the rate of inflation and unemployment, improvement in the balance of payment, accumulation of financial saving and external reserves as well as stability in exchange rate.
Sustainable economic growth and development is undoubtedly, one of the most challenging development issues in third world countries today. Even from the days of father of Economics, (Adams, 1992), the main focus of macroeconomic thinkers and policy makers is how to attain macroeconomic stability. In Nigeria, especially before SAP, there had been an undue emphasis on the use of fiscal policy at the expense of monetary policy (Darrant, 1984) which is frequently breached. It was in 1987, after SAP that emphasis shifted to monetary policy following the wake of deregulation of money market which prevents money becoming a major source of disturbance in the Nigeria economy. Today, fiscal and monetary policies are inextricably linked in macroeconomic management as developments in one sector directly affect developments in the other.
Moreover, there are consensuses among economists that monetary and fiscal policies, jointly and individually affect the level of economic activities. The degree and relative superiority of one instrument over the other in achieving these objectives has been subject of debates and controversies among policy makers and economists; tentative resolutions are attempted empirically for different countries and different periods and circumstances. The policies have been a subject of debate between the monetarists and Keynesians. The monetarists led by Milton Friedman believed that money supply exerts greater impact on economic activities while the Keynesians led by John Maynard Keynes believed that government expenditure rather than money supply exerts greater influence on economic activities.
Money supply which affects output, income and prices as well as the balance of payments is therefore, the central piece of monetary tools and intermediate target of monetary policy. In theoretical terms, it is denoted as M1 or M2, narrow and broad definition of money respectively. Government expenditure is the main tool of fiscal policy. It can be financed from direct and indirect taxes, monetization of foreign exchange earnings, and domestic credit from the banking system including ways and means of advances by the central bank and borrowing from non-bank public. On the user’s side, disbursement of these funds could be informed by current or capital expenditure which is broken down further into smaller subheads.
Since the late 1960s, fiscal policy has become a major instrument in Nigeria. The reasons for these are not inconsiderable. First is the domestic role of the public sector in major (formal) economic activities in Nigeria. This can be traced to several factors. Among them are oil boom in early 1960s, the need for reconstruction after the civil war, the industrialization strategy adopted at the time (import substitution industrialization policy) and the militarization of governance. The second reason for the increasing dominance of fiscal policy in the management of the economy is the fall in the international price of oil in the late 1980s. Furthermore, the persistent fiscal deficit since the early 1960s and role of underwriting CBN treasury securities to commercial agents as also influenced the dominance of fiscal actions. Government subsequently opted for discount houses which specialized agency focusing mainly on this function.
Another cause of the declining local capacity utilization has the fierce competition from foreign firms under the spirit of liberation which is a cardinal principle of SAP. Poor macro infrastructure, despite the huge oil rents the country has earned thus far has made it difficult for indigenous firms to complete globally. Most indigenous firms are required to make capital investments in basic infrastructure like roads, securities, water and electricity. The result of such huge outlay is that the indigenous firms are greatly disadvantaged when competing in a global world.
Admittedly, government has, despite SAP sometimes imposed high tariffs on some imported goods and sometimes banned them out rightly. The utility value of such is however suspected. Without necessary support infrastructure and conducive environment for sustainable economic development to take place, infant industry protection will be of little consequence.
1.2 Statement of the Problem
The direction of monetary policy and in particular, the emphasis onmore relevant and effective instruments came in the wake of deregulation of money market beginning from 1987, monetary policy from then onwards laid greater emphasis on preventing money from becoming a major source of disturbance in the economy. Excessive money supply were being tackled at all costs, hence the recourse to stabilize securities among other instruments.
Today, money supply and government expenditure are both commonly accorded prominent roles in the pursuit of macroeconomic stabilization in developing countries but the relative importance of both has been a serious debate between the Keynesians and the monetarists. The monetarists believe that money supply exerts greater impact on economic activities while the Keynesians believe that government expenditure rather than the money supply exert greater influence on economic activities. Giving the fact that both money supply and government expenditure have great impact on economic growth, it is not surprising that they are entwined. Fiscal and monetary policies are inextricably linked in macroeconomic management, development in one sector directly affect developments in other. Undoubtedly, fiscal policy is central to the health of any economy, as government’s power to tax and to spend affects the disposable income of citizens and corporations, as well as the general business climate. In this regard, the interrelationship between public spending and private sector performance is of paramount importance.
On one hand, government expenditure can provide an impulse for private sector growth, while on the other hand, it can be harmful if it results in budgets deficits and leads to competition for scarce financial resources from the banking sector as the government seeks to finance the deficits. In such circumstances, the crowding out of the private sector by the government sector outweighs any short term benefits of an expansionary fiscal policy. The key to all these, therefore, lie in striking a good balance in the fiscal management. Having enough expenditure outlays to meet the needs of government and support growth but not so much as to deny the private sector the resources it need to invest and develop.
The problem is that poor management of money supply and government expenditure will lead to increase in general price level, high unemployment rate, balance of payment deficit, unequal distribution of income, poverty etc.
The research questions emanating from the study are:
1.3 Objectives of the Study
The broad objective of this study is to empirically investigate the relative impact of money supply and government expenditure on economic growth in Nigeria.
The specific objectives are to:
1.4 Research Hypothesis
For the purpose of this study, the following hypotheses are developed and will be tested in due course:
H1: Money supply is effective in managing Nigerian economy
H1: Government expenditure is effective in managing Nigerian economy
not enhance the achievement of macroeconomic economic objective of
H1: Complementary use of money supply and government expenditure do
Enhance the achievement of macroeconomic economic objective of
Global financial crisis
H1: Government expenditure is more effective in cushioning the effects of
The global financial crisis.
1.5 Significance of the Study
The key function of government is to protect and promote the welfare of its citizens. In doing this, the government must choose the economic approach to pursue. It may, for instance, decide to pursue a control economic approach, a free market economic approach or synthesis of both monetary and fiscal policies play a key role in the promotion of the main government objectives of promoting the welfare of its citizens.
There has been quite a lot of research work on the impact of monetary policy and fiscal policyon economic growthin Nigeria with special reference to money supply and government expenditure. Notable authors has been seen in the literature: Ajayi (1974), Aigbokhan (1985), Familoni (1989), Olaoye and Ikhide (1995), Asogu (1998), Ajisafe and Folorunso (2002), Ogunmuyiwa and Ekone (2000), Adefeso and Mobolaji (2000) among others. This shows an indebt study of monetary and fiscal policies as instruments use in macroeconomic management in Nigeria. Most of the studies centered on policy management and impact on the economy.
This study is desirable because it attempt to establish whether or not the money supply and government expenditure is more potent in stabilizing the economy during the global economic meltdown using econometric technique. The major importance of this study is to review and update previous studies especially in this era of continuous monetary and fiscal policies changes and giving the desire to achieve price stability and growth. The previous studies could not cover the period of major policy reforms in the banking sector by the present administration especially on the monetary policy and the current global economic crisis. Investigating the impact of these policies instruments on the macroeconomic management is considered crucial; findings will provide a basis to justify or otherwise such policy management changes.
1.6 Scope of the Study
The relative impact of money supply and government expenditure oneconomic growthin Nigeria will be examined by breaking the period covered in this study into two for the purpose of inter-temporal comparison. The time series properties of the variables will be investigated using annual series data from period 1960-2000. This periodization is in inconsonance with the country’s monetary and fiscal policies changes.
It is expected that information of this study will guide the operators of the Nigerian economy on which of thepolicies (monetary or fiscal) instrumentsis more potent in achieving macroeconomic objectives like price stability, reduction of unemployment rate, economic growth, equitable distribution of income, balance of payment, etc.
1.7 Organization of the Study
This study is structured into five chapters including the introduction as chapter one, chapter two is literature review, chapter three is methodology, chapter four is empirical analysis and chapter five is summary of major findings, conclusion and recommendations.
Consider monetary policy through open market operations which begins with central bank buying a quantity of treasury securities from the commercial banks and other authorized dealers. The banks consequently acquire excess reserves and expand their lending and so the money supply expands. To a monetarist, the lending activity itself generates spending the upward pressure on the security prices provides capital gains to be spent or invested. Either way, as money supply increases, income and output also increase depends on how responsive consumption and investment are, in real terms, to change in interest rates. If investments are interest – elastic or respond quickly, then the effects will tend to be large via the investment multiplier. The implication of this is that the elasticity of the money supply in the money and the investment schedules is crucial in accessing the role of money supply.
It is posted that the discrepancy between money supply and money demand comes about in two ways, namely, direct printing of money by central bank or through the use of any of the monetary control techniques. The direct printing of the money increases money supply, while the use of tools of monetary controls affects the volume of bank reserves setting in motion the machinery of portfolio adjustment on the part of the banks. This concerns particularly their credit-creating ability which leads to change in money supply.
Through the multiple expansionary policies leading to increase in money supply leads to portfolio and credit effects. The portfolio effect comes about through substitution of other financial assets to rid excess money balance. Attempt to buy other financial assets pushes up their price, depressing their yield (or rate of interest). The credit effect occurs through attempt by commercial banks to adjust their lending policy in the light of change reserves. Increased reserves tend to create more credit effects work or to press or decrease the rate of interest.
The monetarist transmission mechanism is based on the hypothesis that money is not just a close substitute for the small class of financial assets but rather a substitute for a large spectrum of financial and real or physical assets. Thus if the central bank through its open market operation (purchases of government securities) increase money supply, sellers will want to rid themselves of excess money balance since their desired and contend that if sellers were individuals who deposit proceeds in the bank accounts, bank reserves will increase and hence banks’ ability to create credit.