Monetary Policy and Nigeria’s Economic Growth: Causality and Impact Analyses

Abstract

Monetary policy plays a crucial role in shaping macroeconomic stability and growth in developing economies like Nigeria, though its effectiveness remains challenged by persistent economic volatility. This study examines the nexus between monetary policy and economic growth in Nigeria over the period 1981–2025. Real Gross Domestic Product growth rate (RGDP) is adopted as the dependent variable, while monetary policy rate (MPR), liquidity ratio (LQR), and cash reserve ratio (CRR) serve as the explanatory variables. The study applies the Vector Error Correction Model (VECM) alongside Granger causality techniques. Empirical findings confirm the presence of a stable long-run equilibrium relationship among the variables. Specifically, CRR and LQR show negative effects on economic growth in the long run, whereas MPR indicates a marginal positive contribution. In the short run, none of the monetary policy instruments demonstrates statistical significance. Causality analysis showed an absence of causality between the CRR, LQR, INF and TOP on one side and RGDP on the other side, however MPR granger caused RGDP. The study concludes that while monetary policy has the potential to stimulate growth, its effectiveness is constrained by structural bottlenecks in the economy and the financial system.