Relative Effectiveness Of Monetary Policy On Balance Of Payment: Evidence From Nigeria

Authors: Okoroafor, O.K. David Ph.D; Adolphus, Ademola James
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This study examined the effectiveness of monetary policy on Balance of Payment (BOP) positions in Nigeria. The effectiveness of monetary policy in correcting BOP deficit and maintaining external balance is the reason behind this study. Monetary instrument investigated are; Broad Money Supply (M2), Monetary Policy Rate (MPR) and Prime Lending Rate (PLR).The study employed time-series data which spanned between 1981 and 2016.Auto-Regressive Distributed Lag (ARDL) Model was used to examine the effects of stochastic shocks of the endogenous variables in the midst of Error Correction Model (ECM) technic to establish the long-run effect of Monetary Policy Instrument on Balance of Payment. The findings shows that Long run relationship exists among the monetary policy variables and BOP. The core outcome of this study is that monetary policy variables of Broad money supply, Monetary Policy Rate and Prime Lending Rate are major monetary factors that determine BOP in Nigeria. The study concluded that monetary policies and implementation capacity is important in the Nigerian economy, because it is very special for determining Balance of Payment positions and its spill over effect on Internal Balance. Also, from the study, Balance of Payment has been established to be a monetary phenomenon and monetary policy can be used by monetary authority to improve and stabilised the foreign sector performance in Nigeria.