Empirical Investigation of Optimal Monetary Policy Instrument for Nigeria Using the Bondstest Approach to Cointegration

Abstract

Evidences from academic literature shows that, it is inappropriate for the Central Bank of Nigeria (CBN) to adjust both liquidity in circulation and the rate of interest at the same time. It therefore, becomes imperative to use appropriate monetary policy instrument for the effective implementation of micro and macroeconomic goals in Nigeria. To ensure this, the study adopted secondary time series data collected from Central Bank of Nigeria, spanning the period of 1990Q1 to 2020Q2. The bonds test approach to cointegration was used to analyse the data. Results of study showed the superiority of monetary policy combined instrument and interest rate instrument. Also, the study indicated that the influence of CBN on money supply is significant than her influence on credit supply. This is because monetary base is the most important determinant of total supply of credit, which the CBN has less influence to control. The study, therefore, recommends that the central Bank of Nigeria (CBN) should implement effective contractionary monetary policy instruments, especially, if its goal is to stimulate investment, full employment, balance of payments surplus and economic growth in Nigeria.