Fiscal-Monetary Policy Mix and Output Response in Nigeria

Abstract

Over the years, fiscal and monetary policies have been choicely employed by policy makers in Nigeria to influence and stabilize the behavior of the aggregate economy. However, it is pretty difficult for policy makers to ascertain which of the fiscal and monetary actions is actually responsible for driving the economy at a specific point in time. The study examined fiscal-monetary policy mix and output response in Nigeria. Data used for the study were obtained from 2018 CBN statistical bulletin spanning through 1981- 2018 and analyzed through the Ordinary Least Square (OLS) using the Error Correction Mechanism (ECM) model. The results of the study indicated that fiscal and monetary policy as the government macroeconomic demand management policies cannot be effective in achieving the desired macroeconomics objectives independently as there exits mutual relationship between them but must be carefully and tactically applied. The implication of this finding is that if government increases public expenditure to infrastructure such as power will enhance the performance of the manufacturing output. The study recommended that there is a need to take a two-tiered policy approach that combines elements of both fiscal and monetary policy. In terms of monetary policy, the federal government through the apex bank should cut interest rates which presumably will allow credit markets to loosen up again, while it is recognized that this is merely a short-term solution. Furthermore, the fiscal policy approach on the part of Apex Bank should include specific initiatives to increase tax cuts for those who are likely to be most affected by non-availability of credit to small and medium-sized businesses that have their entire livelihood sunk in the availability of credit.