Monetary Policy and Unemployment in Nigeria

Abstract

This study investigates the effect of monetary policy on unemployment in Nigeria from 1986 to 2024, a period marked by significant macroeconomic shifts, including the Structural Adjustment Programme (SAP) and recent post-COVID-19 recovery efforts. The study examines how monetary policy instruments—monetary policy rate (MPR), inflation rate (IFR), exchange rate (EXR), money supply (MS), and cash reserve ratio (CRR)—affect the unemployment rate. An ex-post facto research design was adopted using secondary time-series data sourced from the Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS), and the World Bank. The study is grounded in the Solow Growth Model, Keynesian Theory, and Endogenous Growth Theory. Unit root tests were conducted to determine stationarity, while cointegration was examined using the ARDL bounds testing approach. The Autoregressive Distributed Lag (ARDL) model was then estimated, followed by post-estimation diagnostic tests. The findings reveal that monetary policy significantly affects unemployment in Nigeria. Money supply exhibits a positive effect on employment generation, while a high monetary policy rate constrains economic growth and employment. Inflation and exchange rate instability show significant short-run and long-run relationships with unemployment. The study recommends balanced MPR settings, effective inflation targeting, and exchange rate stability to promote employment growth. It also suggests complementing monetary policy with supportive fiscal reforms for optimal macroeconomic outcomes.