Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate
Economic theory suggests that monetary policy can be used to stabilize an economy. However, the ability of monetary policy targets—interest rates and money supply—to stabilize an economy depends on their ability to achieve price stability. Using data from 1981 to 2018 and applying the vector error c...
Saved in:
| Main Author: | |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
Riga Technical University Press
2020-02-01
|
| Series: | Economics and Business |
| Subjects: | |
| Online Access: | https://doi.org/10.2478/eb-2020-0010 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| _version_ | 1850180852781154304 |
|---|---|
| author | Ezeibekwe Obinna Franklin |
| author_facet | Ezeibekwe Obinna Franklin |
| author_sort | Ezeibekwe Obinna Franklin |
| collection | DOAJ |
| description | Economic theory suggests that monetary policy can be used to stabilize an economy. However, the ability of monetary policy targets—interest rates and money supply—to stabilize an economy depends on their ability to achieve price stability. Using data from 1981 to 2018 and applying the vector error correction model, this paper seeks to determine how the changes in the inflation rate affect the ability of monetary policy tools to stabilize the Nigerian economy and stimulate investment. Empirical results suggest that the impact of the interest rates on investment depends on the level of the inflation rate. The size of the effect of interest rates on investment gets weaker as the inflation rate increases suggesting that monetary policy tools, such as the monetary policy rate (MPR), that directly change the interest rates are robust stabilization tools during periods of declining inflation rates but not relevant during periods of rising inflation rates. This is attributable to low bank lending rates. Additionally, the impact of the money supply target on investment does not depend on the level of the inflation rate. This suggests that monetary policy tools, such as open market operations, that directly change the money supply can be relevant stabilization tools during economic booms and recessions. As a result, the Central Bank of Nigeria should work to deepen the scale, capacity, and efficiency of its open market operations by ensuring that most of the people can participate with minimal transaction cost and by making different financial instruments available. |
| format | Article |
| id | doaj-art-eaf6fcb61bdf4727a738ac68bf1be148 |
| institution | OA Journals |
| issn | 1407-7337 2256-0394 |
| language | English |
| publishDate | 2020-02-01 |
| publisher | Riga Technical University Press |
| record_format | Article |
| series | Economics and Business |
| spelling | doaj-art-eaf6fcb61bdf4727a738ac68bf1be1482025-08-20T02:18:01ZengRiga Technical University PressEconomics and Business1407-73372256-03942020-02-0134113915510.2478/eb-2020-0010eb-2020-0010Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation RateEzeibekwe Obinna Franklin0Eastern Illinois University, Charleston IL, U.S.A.Economic theory suggests that monetary policy can be used to stabilize an economy. However, the ability of monetary policy targets—interest rates and money supply—to stabilize an economy depends on their ability to achieve price stability. Using data from 1981 to 2018 and applying the vector error correction model, this paper seeks to determine how the changes in the inflation rate affect the ability of monetary policy tools to stabilize the Nigerian economy and stimulate investment. Empirical results suggest that the impact of the interest rates on investment depends on the level of the inflation rate. The size of the effect of interest rates on investment gets weaker as the inflation rate increases suggesting that monetary policy tools, such as the monetary policy rate (MPR), that directly change the interest rates are robust stabilization tools during periods of declining inflation rates but not relevant during periods of rising inflation rates. This is attributable to low bank lending rates. Additionally, the impact of the money supply target on investment does not depend on the level of the inflation rate. This suggests that monetary policy tools, such as open market operations, that directly change the money supply can be relevant stabilization tools during economic booms and recessions. As a result, the Central Bank of Nigeria should work to deepen the scale, capacity, and efficiency of its open market operations by ensuring that most of the people can participate with minimal transaction cost and by making different financial instruments available.https://doi.org/10.2478/eb-2020-0010inflation rateinvestmentmonetary policynigeriavector error correction modele22e31e43e52e58 |
| spellingShingle | Ezeibekwe Obinna Franklin Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate Economics and Business inflation rate investment monetary policy nigeria vector error correction model e22 e31 e43 e52 e58 |
| title | Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate |
| title_full | Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate |
| title_fullStr | Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate |
| title_full_unstemmed | Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate |
| title_short | Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate |
| title_sort | monetary policy and domestic investment in nigeria the role of the inflation rate |
| topic | inflation rate investment monetary policy nigeria vector error correction model e22 e31 e43 e52 e58 |
| url | https://doi.org/10.2478/eb-2020-0010 |
| work_keys_str_mv | AT ezeibekweobinnafranklin monetarypolicyanddomesticinvestmentinnigeriatheroleoftheinflationrate |