USING MONETARY AND FISCAL POLICY MIX TO RESTORE MACROECONOMIC EQUILIBRIUM: AN EXAMINATION OF CONTEMPORARY REALITIES

Abstract

Macroeconomic policies are used to drive economies through the path of sustainable growth and development following systemic shock to the circular flow. In Nigeria, concerns have been expressed at the tepid pace of adjustment in response to deployment of traditional monetary and fiscal policy tools. In this paper, the author conceptualizes the typical transmission mechanism of policy instruments, namely interest rate, cash reserve requirement, government expenditure, tax and public sector borrowing requirement with a view to investigate their effectiveness in achieving growth and employment generation goals. The author employed ex-post facto research design to collect annual data of 31 years, and formulated a dynamic system model and correction procedures of unrestricted vector auto-regression (VAR). Among others, the author found that interest rate entered output function positively as lag variable suggesting a non-trivial delayed effect of this monetary policy anchor. But surprisingly, it did not appear to have steady relationship with lending rates. On the fiscal side, tax proxy was found to be a weak policy tool and it showed anomalous positive relation with national output. Recurrent and capital spending showed mixed results with seemingly neutralizing effect. In all, the author found disturbing evidence of monetary/fiscal policy non-convergence