JOURNAL OF NIGERIAN INQUIRY IN THE HUMANITIES (NIITH)

Impact of Monetary Policy Shock on Output and Price Dynamics in Nigeria

Abstract

The investigation of the effects of monetary policy shocks on- output and prices is necessary to assist policymakers, businesses, and investors in formulating and implementing monetary policies. Therefore, this study examines the effects of monetary policy shocks on output and price dynamics in Nigeria from 1981 to 2021 with the Johansen techniques and VEC model, The study finds a percent increase in money supply resulting into a long-run increase in output and prices. Additionally, the study revealed that a percent increase in interest rates caused a price increase and a reduction in output in the long run. The innovation accounting results revealed that money supply shock had an insignificant effect on output but significantly increased prices by approximately 8% above the steady state. Conversely, an interest rate shock significantly raised prices by about 3% above the steady state but output declinde by roughly 3%.. The Granger causality test revealed that money supply causes price in the short run without feedback but both causes each other in the long run. The Nigerian monetary authority is thus advised to formulate policies to optimally regulate money in circulation to, control price fluctuations and adopt interest rate targeting to maintain growth-driven interest rates.