An Empirical Analysis of Monetary Policy and Private Sector- Led Investment in Nigeria, 1986-2011.

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AN EMPIRICAL ANALYSIS OF MONETARY POLICY AND PRIVATE SECTORLED INVESTMENT IN NIGERIA, 1986-2011.

BY

EZIE OBUMNEKE Department of Economics Bingham University, Karu, Nasarawa State 08069430911 eobumneke@yahoo.com

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ABSTRACT This study undertakes an empirical analysis of the impact of monetary policy measures on private sector-led investment in Nigeria between,1986-2011. In the process, a number of traditional hypotheses on nominal interest rates, nominal exchange rates and broad money supply reflecting Central Bank of Nigeria, CBN, monetary policy measures and private sector investment are statistically tested. Co-integration and unit root test conducted for the variables shows that they have a long term, or equilibrium relationship between them. The estimated log-linear multiple regression equation reveals that inadequate infrastructural facilities made returns on autonomous part of private sector investment negative. This was captured by the negative numerical value of the intercept. Another important revelation is that exchange rate depreciation raises the cost of imported goods, and since a large part of investment goods are imported in Nigeria, such depreciation dampens private sector investment. The prevailing interest rate structure encouraged private sector investments in the tertiary sector at the detriment of the primary sector due to the increase in broad money supply. Finally, the statistical significance of nominal interest rates, nominal exchange rates and broad money supply as determinants of private sector investment are all poor, thus indicating that the CBN monetary policy measures had no significant impact on private sector investment in Nigeria between 1986-2011. Suggestive from the analysis therefore are that effective policies and basic infrastructural facilities that would improve national income and productivity should be provided.

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I.

INTRODUCTION Over the years, monetary policy objectives have remained the attainment of internal

and external balance of payments. Emphasis however, on techniques/instruments to achieve those objectives has changed over the past decades. In the case of Nigeria, there have been two major phases in the pursuit of monetary policy which are: before 1986 and since 1986. The first phase placed emphasis on direct monetary controls, while the second reflects the transition to market mechanisms. The economic environment that guided monetary policy before 1986 was characterized by the dominance of the oil sector, the expanding role of the public sector in the economy and over dependence on the external sector. In order to maintain price stability and a healthy balance of payments position, monetary management depended on the use of direct monetary instrument such as credit ceilings, selective credit controls, administered interest rate and exchange rate, as well as the prescription of cash reserve requirements and special deposits (Ojo, 1998:14). The use of market based instruments was not feasible at that point because of the under developed nature of the financial markets, low private sector-led investments and the deliberate restraints on interest rates. The most popular instrument of monetary policy was the issuance of credit rationing guidelines, which primarily set the rates of change for the components and aggregate commercial bank loans and advances to the private sector. The sectoral allocation of bank credit in Central Bank of Nigeria,(CBN) guidelines was to stimulate the productive sectors and thereby stem inflationary pressures. The fixing of interest rates at relative low levels was done mainly to promote investment and growth. Alexander (1995) opined that in the mid-1970, it became increasingly difficult to achieve the aims of monetary policy. Generally, monetary aggregates, GDP growth rate, inflation rate and balance of payments position moved in undesirable directions. The monetary control frame work, which relied heavily on credit...
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