Fiscal-monetary Policy Mix And Output Response In Nigeria (1960-2012)

INTRODUCTION

The use of economic policy as tool for economic stabilization by governments of different economies of the world cannot be overemphasized. Some of these policy measures may have economic-wide effect (e.g. the budget and inflation) while others may have specific effects such as the consumption tax on consumer good (Killick, 1981 and Black, Calitz, Steenekamp, Ajam, 2000). Policymakers around the world employ various policies, singly or mix, to stabilize the boom-bust cyclical swings of economic activities. In macroeconomic management, the two most commonly employed policies are the fiscal and monetary policies.

The Monetary policy, managed by the Central Bank, is conducted through changes in the money supply and interest rate. While the Fiscal policy, which is managed by the government of that economy, is conducted through changes in government spending and taxes (Liborio, 2011; Hussain, Wijeweera and Hoang, 2012). Despite the fact that monetary and fiscal policies are implemented by two different bodies, these policies are far from independent. In fact, a change in one may influence the effectiveness of the other and thereby the overall impacts of any policy change. Since 1980s, there has been a general consensus among economists in favour of monetary policy as a more effective stabilization tool relative to fiscal policy (Mishkin, 2004; Mankiw, 2005; and Bullard, 2012), however, the recent global financial crisis of 2007 has renewed much interest on fiscal stimulus.

In recent times, policy makers are prompted to employ unconventional actions to stabilize the national economy. Precisely, while monetary policymakers turn to quantitative easing (the purchase of financial assets so as to lower long-term interest rates, thereby increasing the money supply), fiscal policymakers increase government spending and reduce taxes so as to boost employment and output (Liborio, 2011). The global economic meltdown, which persisted until 2009, had significant adverse effects on the real economic activities of many developing countries. For instance the Nigerian real GDP growth rate decline from 7.6 per cent in 2006 to 6.0 per cent at the onset of the crises in 2008. The effect of the global crisis was pervasive and its adverse effect remained noticeable in the areas of agriculture, industry and the wholesale sub-sectors in Nigeria (CBN, 2009). Similar trends were also observed in other countries of the world. To ensure that their economies are insulated or protected from the possible negative effects of such snowballing, many countries especially developing countries had resulted to the use of domestic macroeconomic policy to re-engineer their economy and provide some policy palliative that can assist in stabilizing their economies.

Nigeria in particular had, in response to the global economic crisis, introduced both monetary and fiscal stimuli as proactive measures to prevent the economy from nose-diving into further economic depression. The policy measures adopted by government were mainly on three broad fronts namely: monetary policy, fiscal policy and trade policy. In Nigeria, fiscal and monetary policies (especially the tools of government expenditure, money supply and monetary policy rate (MPR)) have been extensively used by the government and other policy makers to stimulate output.. In order to appreciate the policy-source of these variations in output performance over the years, it is necessary to take a retrospective look at the conduct of fiscal and monetary policy in Nigeria.