Volume( 18) - Issue( 1) 2021 pp 12-30 DOI:

EFFECT OF EXPANSIONARY MONETARY POLICY ON HOUSEHOLD CONSUMPTION IN NIGERIA: EVIDENCE FROM MONEY SUPPLY

Title

EFFECT OF EXPANSIONARY MONETARY POLICY ON HOUSEHOLD CONSUMPTION IN NIGERIA: EVIDENCE FROM MONEY SUPPLY

Abstract

This paper examined the effect of expansionary monetary policy on Nigeria’s household consumption using annual data covering the period 1981 to 2019 by applying econometric techniques to test empirically the hypotheses developed. Cointegration analysis is introduced to capture long-run & short-run relationships among variables using systems simultaneous equation. This is because Vector Autoregressive (VAR) treats all variables as endogenous. Following this approach, employing VAR through Vector Error Correction Mechanism (VECM) procedure, the simultaneous equation was simulated. The study further conducted forecasting involving impulse response and variance decomposition simulations to evaluate the period under study. Also the study examined causality relationships among series using the VECM Granger causality approach to understand short-run causality among variables via F-/Wald test simulation. Later, the systems simultaneous equation aforementioned is estimated employing Ordinary Least Square (OLS). Empirical results indicate that money supply has a positive and significant relationship with household consumption, whereas inflation has a negative relationship with household consumption in its two lags. The VECM Granger causality result also shows that money supply and inflation does not cause household consumption. A further review of the impulse response function indicates that money supply will positively contribute to household consumption in the short-run and long-run. Based on the findings, this study recommends that money supply should be watched out so as to maintain stable prices, especially if government wants to keep household consumption on track.

Keywords

Money supply; Inflation; Household consumption; VECM.