Reconsidering the nexus between monetary policy and economic growth in Nigeria: The role of interest rate, money supply, and financial inclusion

Abstract

The empirical evidence on the nexus between monetary policy and economic growth remains ambiguous with mixed and differing results, depending on the country's characteristics, the choice of monetary policy variables employed, and recently, the place of financial inclusion in monetary policy formulation and transmission mechanism. This study explores the nexus between monetary policy and economic growth in Nigeria while accounting for the roles of interest rate, money supply, and financial inclusion over a base period of 2004q1 to 2020q4 and a projected period of 30 quarters. Using the dynamic simulation autoregressive distributed lag (ARDL) model, the study finds that in the short run, only the effect of money supply on economic growth is statistically significant. However, in the long run, interest rate, money supply, and financial inclusion have statistically significant effects on economic growth. The results are supported by the plots of the dynamic simulated ARDL, where economic growth response is predicted at various time periods after forcing a ±1% change (positive and negative shocks) in interest rate, money supply, and financial inclusion. We, therefore, recommend among other things an aggressive financial inclusion strategy with clearly defined deliverables and timelines to reduce the percentage of persons excluded from the formal financial system.

Effect of financial inclusion and fintech on the effectiveness of Indian monetary policy: an empirical investigation

“…The monetary policy of a country is considered the key driver of its economic activities (Goshit et al, 2022;Iorember et al, 2022). The objective of monetary policy is to stabilize the financial system.…”

“…The monetary policy of a country is considered the key driver of its economic activities (Goshit et al. , 2022; Iorember et al. , 2022).…”

“…The indirect impact of other vital variables affecting the monetary policy effectiveness is captured by augmenting Model 1 in the form of Model 2 and Model 3. In doing so, Model 2 includes Wealth creation and Model 3 includes a transmission mechanism through the cost of capital (Iorember et al, 2022;Jungo et al, 2022;Lapukeni, 2015). Model 4 is a comprehensive model framed to capture the direct and indirect impact of all the variables chosen on MPE.…”

Financial inclusion and monetary policy targets: Evidence from the ECOWAS countries

“…These channels of monetary transmission mechanism work efficiently in an environment where the financial sector is well developed, with financial services, products, and resources being accessible and affordable to the people including those at the lower rung of the income ladder. In effect, the new thinking toward the effectiveness of monetary policy is not only how well money supply and interest rates engender economic growth and price stability but also involves financial inclusiveness in terms of accessibility to financial products and services (Iorember et al, 2022;Gbaka et al, 2021;Alade, 2015).…”

“…This is important at a time such as this when the major targets of monetary policy (price stability, economic growth, unemployment control, and exchange rate stability) in ECOWAS seem to be underperforming (Goshit et al, 2020). A few studies (Iorember et al 2022;Marwa, 2019;and Lenka et al, 2016) have considered the role of financial inclusion and its effectiveness in monetary policy transmission. The results from these studies indicate that growing financial inclusion improves monetary policy effectiveness.…”