THE RELATIVE EFFECTIVENESS OF MONETARY AND FISCAL POLICY ON ECONOMIC GROWTH OF NIGERIA

THE RELATIVE EFFECTIVENESS OF MONETARY AND FISCAL POLICY ON ECONOMIC GROWTH OF NIGERIA

CHAPTER THREE

RESEARCH METHODOLGY

3.1.      Introduction:

This chapter talks about the various technique engaged in the execution of the research work. It acts as a guideline to give further understanding on the findings of this research work and also a stepping stone for further research works to be embarked upon. It entails the model specification for analysis, the a-priori expectation, the method of data collection, definition of analytical variables and the estimation technique.

3.2.      Model Specification:

3.2.1.   Model 1:

Various theoretical and empirical researches revealed in chapter two of this work proves that there exists a long-run positive relationship between monetary and fiscal policy and mitigations in a recessed economy signified by an increase in the economic growth. Hence to be able to empirically confirm this, the relationship between monetary and fiscal policy and economic growth is given implicitly as;

RGDP Growth Rate = f (INTR, EXCHR, TX, GTE)

Where; RGDP Growth Rate = Real Gross Domestic Product Growth Rate

INTR = Interest rate

EXCHR = Exchange rate

TX = Taxation

GTE = Government expenditure

The implicit function above shows the relationship that Real Gross Domestic Product is actually a function of interest rate, exchange rate, taxation and government expenditure. This function above is in its implicit form as stated hence it lacks the potent of being used as a tool for forecasting. This, therefore, leads to the transformation of the model from the implicit form to the explicit form.

The explicit form of the model is also known as the Econometric form of the model which can be used as a predictor after its parameters are estimated. The explicit form of the function above is thus;

RGDP Growth Rate= β₀ + β₁INTR +β₂EXCHR + β₃TX +β₄GTE + Û ——- (1)

Where; RGDP Growth Rate = Real Gross Domestic Product Growth Rate

INTR = Interest rate

EXCHR = Exchange rate

TX = Taxation

GTE = Government expenditure

Û = other variables not included in the model

The explicit model above is the Double-Log Functional Model used for the analysis of the research work. The interest rate and exchange rate is a measure of monetary policy while taxation and government expenditure is a measure of fiscal policy.

3.2.2.   Model 2:

By the presence of a long-run relationship, it is eminent to conduct a Vector Error Correction Mechanism (VECM) Model.

THE RELATIVE EFFECTIVENESS OF MONETARY AND FISCAL POLICY ON ECONOMIC GROWTH OF NIGERIA