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Quantifying the Impact of Monetary and Exchange Rate Policies on Economic Diversification in Nigeria

Quantifying the Impact of Monetary and Exchange Rate Policies on Economic Diversification in Nigeria

 

Abstract: This paper evaluated the impact of monetary and exchange rate policies on economic diversification in Nigeria using the ARDL approach for the period 1981-2014. The paper derived two distinct indices for diversification for with and without oil as benchmarks for quantifying and analysing the implications of monetary and exchange rate polices on achieving a diversified economy in Nigeria. The results show that the effectiveness of monetary policy and exchange rate is crucially dependent on how diversification and policy instruments are measured. Specifically, while money supply and bank credit had significant positive impact on economic diversification, exchange rate had significant negative impact on diversification, both in the short and long run. However, interest rates and loan to deposit ratio had no significant impact on economic diversification in Nigeria. However, when the oil sector was excluded from the diversification index, the evidence indicated significant impact of all measures of monetary and exchange rate policies on economic diversification in Nigeria. Monetary and exchange rate policies can therefore be seen as a potent force for accelerating economic diversification from oil to non-oil economic activities in Nigeria.

JEL classification: E44, E47, E52, E58

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