IIARD International Institute of Academic Research and Development

INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCIAL MANAGEMENT (IJEFM )

E-ISSN 2545-5966
P-ISSN 2695-1932
VOL. 5 NO. 2 2020

---

Monetary Policy Transmission Mechanism and Dynamics of Unemployment in Nigeria

Johnbosco Chukwuma Ozigbu

---

Abstract

As a key component of macroeconomic policy design, monetary policy has remained a strategic tool employed by the Central Bank of Nigeria (CBN) to control unemployment and achieve price stability. This paper examines the link between the transmission mechanism of monetary policy and unemployment rate in Nigeria. Specifically, the research efforts focused on examining how monetary policy transmission channels – money supply, real interest rate, private sector credits and cash reserve ratio affect unemployment. The Stock-Watson dynamic least squares method and Granger causality test were utilized in analyzing the time series data sourced from the CBN Statistical Bulletin and National Bureau of Statistics. The Phillips- Perron unit root test results reveal that all the variables are integrated of order one. It was found from the cointegrating regression result that broad money supply is positively linked to unemployment rate. On the contrary, private sector credit as a ratio of GDP has significant negative effect on unemployment rate. This finding is very welcoming as it explains the effectiveness of monetary policy transmission mechanism in reducing unemployment rate in Nigeria. However, it was found that real interest rate and cash reserve ratio are statistically insignificant in influencing unemployment in Nigeria. The Granger causality test results reveal that unidirectional causality flows from broad money supply and private sector credits to unemployment. This is indicative that broad money supply and private sector credits have predictive powers for unemployment in Nigeria. Given the findings, it is recommended for the monetary policy committee and other stakeholders in the Nigerian financial system to prioritise increase in private sector funding and monetary aggregates in order to enhance the effectiveness of monetary policy in reducing unemployment

keywords:

Monetary policy, unemployment rate, broad money supply, real interest rate, private sector credits and cash reserve ratio

---

References:

Amassoma, D., & Esther, F. 0. (2015). The efficacy of monetary policy variables in reducing
unemployment rate in Nigeria. International Finance and Banking, 2(2),52.

Blanchard, O., & Gali, J. (2005). Real wage rigidities and the New Keynesian model (No.
w11806). National Bureau of Economic Research.

Bhattacharyya, N. (2012). Monetary policy and employment in developing Asia. Geneva: ILO
Essien, S. N., Manya, G. A., Arigo, M. O., Bassey, K. J., Ogunyinka, S. F., Ojegwo, D. G., &

Ogbuehi, F. (2016). Monetary policy and unemployment in Nigeria: Is there a dynamic
relationship?. CBN Journal of Applied Statistics, 7(1), 209-231.

Engler, P. (2011). Monetary policy and unemployment in open economies. NCER Working
Paper Series, No. 77.

Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on
cointegration—with appucations to the demand for money. Oxford Bulletin of
Economics and statistics, 52(2), 169-210.

Keynes, J.M.(1936). The general theory of employment, interest and money. New York:
Macmillan Cambridge University Press.

Kugler, P., & Sheldon, G. (2010). Unemployment and monetary policy in Switzerland. Swiss
Journal of Economics and Statistics, 146(1), 185-208.

Romer, C. D. and Romer, D. (1994). What Ends Recessions? NBER Macroeconomics Annual,
9, 13-57.

Rodriguez, R. A. (2015). Classical versus Keynesian theory of unemployment: An Approach
to the Spanish Labour Market. Barcelona: Universitat Authonoma de Barcelona.

Söderström, U. & Vredin, A. (2013), “Inflation, Unemployment and Monetary Policy,”
Economic Commenary. Available online at: www.riksbank.se.

Stockhammer, E., & Sturn, S. (2011). The impact of monetary policy on unemployment
hysteresis. Applied Economics, 44(21), 2743-2756.

Stock, J. H., & Watson, M. W. (1993). A simple estimator of cointegrating vectors in higher
order integrated systems. Econometrica: Journal of the Econometric Society, 783-820.

DOWNLOAD PDF

---

Back