The Impact of Monetary Policy on Current Account Balance In Nigeria

Abstract

The study examine the impact of monetary policy on the current account's components for the period 1970-2010 in Nigeria. The study employs Johasen Cointegration, Ordinary Least Square Method (OLS) and Error Correction Model, and the study confirms a long-run relationship between monetary policy (proxy by money supply) and components of current account under consideration. Money supply positively influences all the variables expect exchange rate that is negative. The study further shows that money supply significantly influences exports, imports and industrial output at 5% level of significant. The error correction model shows an appropriate sign, indicating that over 30 percent of the of the last year's shock is adjusted back to the longrun equilibrium association in the present year. The study therefore suggest monetary policy measures that help in providing clear-cut incentives in the importation of industrial raw-materials and equipment and expansion in the volume of exports, so as to reduce the deficit in the current account balance.