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EMPIRICAL INVESTIGATION OF THE IMPACT OF MONETARY POLICY ON MANUFACTURING SECTOR PERFORMANCE IN NIGERIA (1986 – 2012)
Abstract
Monetary policy is one of the macroeconomic instruments with which monetary authority in a country employed in the management of their economy to attained fundamental objectives of price stability, maintenance of balance of payments equilibrium, and promotion of employment, output growth and sustainable development. These objectives are necessary for the attainment of internal and external balance of value of money and promotion of long run growth of the real economic sectors such as the manufacturing sector. It is against this background, that this study examines the impact of monetary policy on Nigeria’s manufacturing sector performance for the period 19862012. Data were collected from the Statistical Bulletin and Annual Report and Statement of Accounts of the Central Bank of Nigeria as well as the Annual Abstracts of statistics (various issues) published by the National Bureau of Statistics (NBS). Unit root test, Granger Causality test, co integration and VAR model were some of the econometrics techniques used for data estimation. Augmented Dickey Fuller (ADF) test statistic revealed that the time series properties of the variables attained stationarity at level and first order. The variables were co integrated at most 2 with at least 3 co integrating equations. The individual variables: external reserve, exchange rate and inflation rate were statistically significant to manufacturing sector output while broad money supply and interest rate were not statistically significant to manufacturing sector output in the previous and current year. However, interest rate, exchange rate and external reserve impacted negatively on the sector output but broad money supply and inflation rate affect the sector positively. The pair-wise Granger Causality results suggest that real exchange rate and external reserves granger cause
Nigeria’s manufacturing output to each other unidirectional. The paper also found that the manufacturing sector contribute insignificantly to the Nigerian economy. Therefore, the study recommended among others that monetary authority should create and implement monetary policies that favoured efficient provider of favourable investment climate by facilitating the emergency of market based interest rate and exchange rate regimes that attract both domestic and foreign investment to the manufacturing industrial sector that are currently operating far below installed capacity. However, in order to maintain and exploit the current investment climate, the Central Bank of Nigeria should introduce more monetary instruments that are flexible enough to meet the supply and demands needs of the manufacturing sector.
Key words: Monetary policy, Fiscal Policy, Monetary Instruments, Monetary Authority and Manufacturing Sector Output.