Background to the Study
It is well known that, there are two main macroeconomic policies (fiscal policy and monetary policy) that can be used by economic managers to manage the health of an economy: expanding economic growth (GDP). The reason is that monetary policy and fiscal policy complement each other. The monetarists believe that monetary policy exert greater impact on economic activity while the Keynesians believe that fiscal policy rather than monetary policy exert greater influence on economic activity (Khosravi and Karimi, 2010). We also believe that economic managers pay more particular attention to one of these two policies (fiscal policy or monetary policy) to stimulate economic growth rapidly. Therefore, the questions that come to mind are: Is the Nigerian economy strongly built on fiscal policy or monetary policy? To what extent do they influence economic growth in Nigeria? How relatively important are they to the growth process of Nigeria? To answer these questions, an empirical study needs to be done, hence, this study.
Fiscal policy is a demand side policy used by the government to achieve macroeconomic objectives. The macroeconomic objectives are economic growth, price stability, reduction in unemployment and balance of payments equilibrium (Kibiwot & Chernuyot, 2012). Fiscal policy involves one of two things; either increasing or decreasing taxation or either increasing or decreasing government spending. All these are done to influence aggregate demand (Kibiwot et al., 2012). If we assume that we want to embark on expansionary policy, two things can be done: We can decrease taxation which might be a decrease in income tax or expenditure tax. This will cause consumption to increase since one’s disposable income increases when income tax falls. In addition, if corporate profit taxes fall, this will make the firms have more profit which can be reinvested into the business, hence, resulting in an increase in investment, all other things remaining unaltered. These will influence the aggregate demand. In a more simplified form, if taxes decrease, consumption will increase, investment will increase and finally aggregate demand will increase. Alternatively, we can increase government spending be it current expenditure or capital expenditure. This will also cause the aggregate demand to increase (Lee & Gordon. 2005; Koeda, & Kramarenko, 2008; Miron, 2013).
Fiscal policy is a major economic stabilization weapon that involves measures taken to regulate and control the volume, cost and availability, as well as direction of money in an economy to achieve some specified macroeconomic policy objective and to counteract undesirable trends in the Nigerian economy (Gbosi, 1998). Therefore, economic stabilization cannot be left to the market forces of demand and supply and as well, other instruments of stabilization such as monetary and exchange rate policies among others, are used to counteract the problems identified (Ndiyo and Udah, 2003). This may include either an increase or a decrease in taxes, government expenditures, as well as public debt which constitute the bedrock of fiscal policy but in reality, government policy requires a mixture of both fiscal and monetary policy instruments to stabilize an economy because none of these single instruments can cure all the problems in an economy (Ndiyo and Udah, 2003).
Monetary policy constitutes the major policy thrust of the government in the realization of various macro-economic objectives. Essentially, monetary policy refers to the combination of discretionary measures designed to regulate and control the money supply in an economy by the monetary authorities with a view of achieving stated or desired macro-economic goals. Another point of view posits that monetary policy refers to any conscious action undertaken by the monetary authorities to change or regulate the availability, quantity, cost or direction of credit in any economy, in order to attain stated economic objectives (Nwankwo, 2000).Monetary policy is designed to influence the behaviour of the monetary sector; this is because changes in the behaviour of the monetary sector influence various monetary variables or aggregates. In effect, the monetary policy in force at any point in time, affects the level of money supply either by expanding it or through contraction of same. It also influences the level and structure of interest rates and thus the cost of funds in the market, depending on the prevailing economic conditions. The regulation and control of the volume and price of money is the discretionary control of money-discretionary in the sense that it is made at the instance of the money authorities. Monetary policy affects the non-bank publics’ holding of real and financial assets in the system. It can thus sustain a divergence between the non-bank publics’ desired portfolio holding (Ajayi, 2008). Monetary policy as a tool of economic stabilization was given by Milton Friedman who held that only money matters, and as such, monetary policy is a more potent instruments of stabilization that fiscal policy (Nzotta, 2004).
Monetary policy measures are monetary management put in place by the government through the central bank. These measures rely on the control of monetary stocks, that is supply of money in order to influence board macro- economic objectives which includes price stability, high level of employment sustainable economic growth and balance of payment equilibrium. These board objectives are achieved through the use of appropriate instrument depending on which objective the policy formulated want to achieved and also on the level of development on the economy (Ikeaka, 2012). In the application of monetary policy measures as instrument of stabilization, instrument of monetary policy are determined by the nature of the problems to be solved and by this environment in which these problems exist. They are broadly two categories of these instruments VIZ- indirect and direct instruments. Indirect instruments are usually used in the market based on economic where the quality of money stock can affected through the relationship between supply and resume money as well as the ability of the monetary authority to influence the creation of reserved.