Monetary Policy Transmission Mechanism and Dynamics of Unemployment in Nigeria

Johnbosco Chukwuma Ozigbu

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 policyunemployment ratebroad money supplyreal interest rateprivate sector credits and cash reserve ratio

References

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Monetary Policy Transmission Mechanism and Dynamics of Unemployment in Nigeria

Abstract

Keywords

References

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