Monetary Policy and Economic Growth in Nigeria and Kenya: An Autoregressive Distributed Lag (ARDL) Approach

Abstract

This study examined the impact of monetary policy on economic growth in Nigeria and Kenya motivated by perceived low and unappreciable economic growth despite implementation of various monetary policy measures. Annual time series data covering 1990 to 2022 were obtained from the World Development Indicators (WDI). The study employed the Autoregressive Distributed Lag (ARDL) approach to examine both long-run and short-run relationships among the variables, while the Vector Autoregression (VAR) Granger causality test was used to determine the direction of causal relationships. Monetary policy variables such as money supply, lending interest rate, exchange rate and inflation rate were used as explanatory variables. The results revealed the existence of a long-run relationship among the variables in both countries. The estimates; in Nigeria, lending interest rate had a positive marginal significant effect on growth, while inflation had a negative and significant effect while Money supply and exchange rate were insignificant. In Kenya, money supply significantly promoted growth, whereas lending interest rate exerted a significant negative effect; inflation and exchange rate were negative but insignificant. The short-run results showed significant adjustments in selected monetary variables, while the error-correction terms confirmed a stable long-run equilibrium. Granger causality results further reveals different patterns of causal relationships across the two countries majorly, Nigeria exhibits a bidirectional causality between inflation and lending interest rate while Kenya exhibits bidirectional causality between exchange rate and economic growth. The study concludes that monetary policy significantly influences economic growth in both economies, though with varying degrees of effectiveness reflecting differences in economic structures and monetary-policy transmission mechanisms The study recommend that enhancing monetary policy effectiveness requires careful undertaken of monetary measures, strengthened monetary policies transmission channels and exchange rate management, implementing growth targeted lending rate, and improved policy coordination to achieve sustainable economic growth and development.