Monetary Policy and Industrial Outputs in Nigeria: The Relevance of Rational Expectation Hypothesis

Abstract

This study investigates the validity or otherwise of the policy ineffectiveness proposition in Nigeria. We adopted the rational expectation theoretical framework and specified a traditional new classical macroeconomic model with price flexibility, market clearing and agent expectation formed rationally. This model was estimated using the Two Stage Least Square (TSL) technique. The findings from the empirical analysis showed that monetary policy affected the real industrial output only by inducing surprises and since there was no systematic (that is predictable) way to manipulate those surprises. In other words systematic monetary policy may not effective in influencing industrial output in Nigeria. The finding is consistent with other studies in this area and also in tune with general characteristics of industrial sector where the level of modernity could be compared to the economic environment of developed countries where the hypothesis has been confirmed. The implication of these results on industrial development is to appreciate that monetary policy cannot be used to influence the cyclical movement of real industrial production in Nigeria. The fact that surprise monetary policy appears more potent in accompanying this, discretional monetary policy pursue to stimulate the real industrial output will be of no effect. Hence monetary policy can do no better than to use a constant growth rate rule such as the one Friedman recommends, since that will reduce the skepticism of the economic agents on the commitment of monetary authority to "announced" policy stance. 
Keywords: Rational Expectations, Real Outputs, Monetary policy, JEL Classifications.