This study has attempted to investigate if macroeconomic policy co-ordination serves as a tool for economic stabilization in Nigeria. The study exhausted theoretical, conceptual and empirical methods in trying to achieve its objectives. The study used the Ordinary Least Square approach to empirically investigate the relationship macroeconomic policy and economic stabilization in Nigeria. The findings of this study can be summarized as; Fiscal policy instruments used are jointly significant at explaining economic stabilization in Nigeria. Furthermore, monetary policy instruments used are jointly significant in explaining economic stabilization in Nigeria. Also Macroeconomic policy co-ordination is sufficient at explaining economic stabilization in Nigeria. Based on the findings of this study, it therefore recommended that; Channels through which fiscal policy is transmitted should be reviewed so as its effect can be felt in the economy for which it was meant to serve. Particular attention should be paid to the government revenue generation strategy as it can be seen that there is a positive relationship between government revenue and economic growth in Nigeria. The political and economic environment should be stabilize to drive business growth and subsequently government revenue. Also, Mechanism through which monetary policy is transmitted should also be reviewed to obtain maximum result from the conduct of monetary policy in Nigeria. Government should increase money supply (with caution so as to avoid escalating inflation) to boost investment which will in turn lead to economic growth. Finally, Macroeconomic policy co-ordination should be carefully watched to avoid round tripping in management of the macroeconomic environment by way of effectively incorporating and educating both fiscal and monetary authorities on the objectives of each institution for a given fiscal year or long period of time.
- Background of the Study
Central to the role of different economies of the world is the need to regulate and stabilize the system in order to achieve macroeconomic objectives (Chigbu and Njoku, 2013), in achieving these objectives a combination of macroeconomic policies such as Monetarypolicy and fiscal policy (and rarely used is the income policy) by government institutions. Monetary policy is aimed at ensuring economic stability and sustainable development [by influencing the value and amount of money in circulation] also fiscal policy aims at achieving macroeconomic objectives through the use of revenue and expenditure instruments Falade and Foloruno (2015). According to Festus (2004), these objectives include economic development and growth, full employment of labour, price stability, equilibrium balance of payment and equitable distribution of income, among others. Fiscal and monetary policies are inextricably linked in macro-economic management; developments in one sector directly affect developments in the other Abata, Kahinde and Bolarinwa(2012).
The success of monetary policy often depends on the operating economic environment, the institutional framework adopted, and the choice and mix of the instruments used. In Nigeria, the design and implementation of monetary policy is the responsibility of the Central Bank of Nigeria (CBN). It is the responsibility of the central bank, through its monetary policy management, to ensure internal and external price stability as well as a sustainable output and employment level within a country (Onwuchekwa, 2016).
Also, fiscal policy aims at stabilizing the economy. Increases in government spending or a reduction in taxes tend to pull the economy out of a recession; while reduced spending or increased taxes slows down a boom. According to Oga, Nkamare and Emori (2013) Fiscal policy element affects the activities of economic operations in the private and public business domain, government influences economic and business activities by means of political and legal processes in the society. These political and legal influences include legislation and other policies established by the government through her regulatory agenciesOgaet al (2013).Furthermore, the implementation of fiscal policy is essentially routed through government’s budget while trying to promote economic conditions conducive to business growth and consistent with economic stability.
The growth and development of the Nigerian economy has not been stable over the years as a result, the country’s economy has witnessed so many shocks and disturbances both internally and externally over the decades (Audu, 2012). In order to improve macroeconomic stability, efforts were directed at the management of excess liquidity, thus a number of measures were introduced to reduce liquidity in the system.Oga, et al (2013) identifiedthese efforts as the reduction in the maximum ceiling on credit growth allowed for banks, the recall of the special deposits requirements against outstanding external payment arrears to CBN from banks, abolition of the use of foreign guarantees/currency deposits as collaterals for naira loans [and increase in Monetary policy rate] and the withdrawal of public sector deposits from banks to the CBN, the rising level of fiscal deficits was identified as a major source of macroeconomic instability. Consequently, government agreed to reduce the size of its deficits.
A cursory review of these two tools of government indicates that proper care is essential in the formulation of appropriate policies that will drive economic stability of emerging economies like Nigerian quest for rapid and sustainable development.
- Statement of the Problem
A major strand in literature regarding the roles monetary and fiscal policies play in fostering economic stabilization is that government’s support for knowledge accumulation, research and development, productive investment, the maintenance of law and order and the provision of other public goods and services can stimulate growth and development in both the short-run and the long run. In this regard Akanni and Osinowo (2013) holds that the interrelationship between public spending and economic growth is of paramount importance given that government expenditure can provide an impulse for economic growth it can also be harmful.
Government uses fiscal (and monetary)policy measures to control the economy and it is pertinent to note that our concern focuses on fiscal (and monetary) policy which stabilizes the economy, when an economy is in a depressed state, it needs stimulation by government (and the central bank) in the form of increased government spending (and reduced interest rate), and when the economy is booming and inflation threatensit reduces taxes (and increases interest rate) (Jhingan, 2004 cited in Ogaet al, 2013).
Data from CBN statistical bulletin (2015) revealed thatgovernment balance has maintained a deficit trend over the past two decadeswith an average of N456.65billion while the CBN maintains a monetary policy rate average of 12.74%, these notwithstanding, the economy has maintained a positive growth rate averaging 6.13% for the same period,this situation is in contrast to theoretical expectations.
Extant Literature reveals that past empirical results differ greatly between the findings of various studiesonmonetary and fiscal stance at promoting Economic stabilization in Nigeria. While Ogaet al (2013) and Chigbu and Njoku (2013) are of the opinion that fiscal policy exerts a higher influence on economic activities in Nigeria, Adefeso and Mobolaji (2012) refutes this claim, stating that monetary policy is more effective at stimulating economic activities in Nigeria. However Falade and Florunso (2015) in their investigation revealed that both monetary policy and fiscal policy are complementary in this regard.
It is against this back ground that this study sets to investigate how the coordination of macroeconomic policies stimulates economic activities in Nigeria.
- Research Questions
The above research question gives rise to the following research questions
- Does coordination of macroeconomic policies serve as a measure for economic stabilization in Nigeria?
- Does monetary policy serve as a tool for economic stabilization in Nigeria?
- Does fiscal policy serve as a tool for economic stabilization in Nigeria?
- Objectives of the study
The broad objective this study is to investigate to what extent has macroeconomics coordination brought about economic stabilization in Nigeria. The specific objectives includesto;
- Investigate if a macroeconomic policy serves as a measure for economic stabilization in Nigeria.
- Investigate if monetary policy serves as a tool for economic stabilization in Nigeria.
- Investigate if fiscal policy serves as a tool for economic stabilization in Nigeria.
- Research Hypothesis
The research Hypotheses to be tested include;
- H01: macroeconomic policy does not serve as a measure for economic stabilization in Nigeria.
- H02: monetary policy does not serve as a tool for economic stabilization in Nigeria.
- H03: fiscal policy does have no significant impact on economic stabilization in Nigeria.
1.6 Significance of the Study
This study will be of relevance to institutions such as Central Bank of Nigeria, National Bureau of Statistics, and federal ministry of finance and others alike for decision and policy making. It will also be of great relevance to investors, business people, and banks to also understand the interaction of monetary and fiscal activities in the country to enable them make wise business and investment decisions. Students and researchers will also find this research work important as a tool of referencing and bedrock for further research.
1.7 Scope of the Study
The study intends to examine the macroeconomic policy as a tool for economic stabilization in Nigeria. It covers of period 36 years (from 1970-2015) using data to be collected from the CBN statistical bulletin.