EFFECTS OF FISCAL AND MONETARY POLICIES ON ECONOMIC GROWTH (1990-2017).
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EFFECTS OF FISCAL AND MONETARY POLICIES ON ECONOMIC GROWTH (1990-2017).
Chapter one
INTRODUCTION
1.1 Background for the Study
Monetary and fiscal policies are the two most important macroeconomic policies available anywhere in the world for achieving economic growth and sustainable development.
Nigeria is not an exception to countries whose primary macroeconomic policies are monetary and fiscal policy. One of the primary goals of monetary and fiscal policies in any economy is to achieve and sustain economic growth.
The achievement of this is paramount, not to mention the achievement of other macroeconomic variables such as employment generation (full employment), price stability, economic development, equity in the system (income redistribution), balance of payment (BOP) achievement, exchange rate stability, and investment growth (Tchokote and Philemon, 2016).
Fiscal policy is the process by which a government adjusts its level of expenditure to monitor and impact a country’s economy. It is used in conjunction with the central bank’s monetary policy to alter a country’s money supply.
These two measures help a country attain its macroeconomic goals. These aims include price stability, full employment, poverty reduction, high and sustainable economic growth, a favourable balance of payments, and debt reduction (Agu, Idike, Okwor, & Ugwunta, 2014).
According to Ogar, Nkamare, and Emori (2014), fiscal policy is a built-in stabiliser in the sense that taxes and government expenditure can be varied at any time the government deems it necessary, so as to suit the economic climate of the country.
Because fiscal policy is goal-oriented, it is usually geared towards achieving price stability, full employment, economic growth, income redistribution, fixed and stable exchange rate, favourable balance of payment, and aid to friendl
Overall, fiscal policy serves as a tool for extracting resources from the private sector of the economy for use by the public sector.
Monetary policy is one of the macroeconomic tools that governments use to manage their economies. Monetary policy is regarded as an important component of macroeconomics, since it involves the use of monetary tools to regulate the value, supply, and cost of money in an economy in accordance with the projected level of economic activity (Ubi, Lionel, and Eyo, 2012).
It encompasses the full range of measures or combinations of packages designed to impact or manage the volume, pricing, and direction of money in the economy per unit of time.
Specifically, it pervades all of the monetary authorities’ debonair efforts to control the money supply and credit conditions in order to achieve various macroeconomic goals. Monetary policy formulation in Nigeria is the responsibility of the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance (FMF).
Nigeria’s monetary environment has been extremely volatile in recent years, making the economy sensitive to shocks from variable commodity prices. If the economy slows and employment falls, policymakers will be encouraged to ease monetary policy in order to stimulate aggregate demand.
When growth in aggregate demand exceeds growth in the economy’s capacity to create, slack is absorbed and employment returns to a more sustainable level.
In contrast, if the economy is overheating and inflation pressures are rising, the Central Bank will be inclined to counter these pressures by tightening monetary policy to bring aggregate demand growth below that of the economy’s capacity to produce for as long as necessary to defuse inflationary pressures and put the economy on a path to sustainable expansion (Anowor and Okorie, 2016).
While these policy choices appear reasonably straightforward, fiscal and monetary policy makers routinely face certain notable uncertainties because the actual position of the economy and growth in aggregate demand at any point in time is only partially known as key information on variables only comes with lags, such that policy makers are constraint to rely on estimates of these economic variables when assessing the choice of appropriate policy and thus could act on
As a result, the purpose of this research is to investigate the interplay of fiscal and monetary policies in Nigeria and the dynamics of growth.
1.2 Statement of Problem
One of the primary goals of Nigerian fiscal and monetary policies is to promote economic growth. Despite the implementation of fiscal and monetary policies
Nigeria’s economic growth and development remain threatened by other macroeconomic trends such as unemployment, inflation, system inequality, a deficit Balance of Payments (BOP), low investment rates, and exchange rate volatility.
In this vein, Greenspan (2003) observed succinctly that “uncertainty is not just an important feature of the fiscal and monetary policies landscape; it is the defining characteristic of that landscape.”
Within the Nigerian monetary environment, data “robustness,” data transmission mechanisms, and fiscal environment are notably found to be her greatest challenge and uncertainty.
This is especially significant because the Nigerian external sector (balance of payment) through changes in net foreign assets and the government budget (net credit to government) influence monetary policies as much as the real growth of the economy and prices.
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