ANALYSING THE EFFECTS OF FISCAL AND MONETARY POLICIES ON INVESTMENT IN NIGERIA (AN EMPIRICAL ANALYSIS 1981- 2015)
ABSTRACT
This research work aims at "Analysing the Effects of Fiscal and Monetary Policies on Investment in Nigeria".
The researcher also examined certain fiscal and monetary policies and their impacts in promoting investment, and hence economic growth.
During the course of this research, it was discovered that expansionary fiscal policies such as increase in government expenditure positively affects investment in Nigeria. Expansionary monetary policies such as increase in money supply acts upon investment positively. Also, increase in government expenditure increases money supply. This emphasizes how important government expenditure is to the overall health of the economy.
Interest rate, which is a monetary policy tool was also examined in the study. Decreasing interest rate ought to affect private investment positively because investors are able to get more loanable funds to increase investment, but in the study years of 1981 to 2015, we discovered that a rise in interest rate led toa rise in investment.. Few reasons for this contrast were provided in this study.
The research work also revealed the degree at which each of the policies have affected investment over the years from 1981 to 2015. A suitable regression technique, as an empirical verification, was used to reveal the relationship that exists between fiscal and monetary policies and investment in Nigeria. However, recommendations on appropriate actions and policies were suggested, as investment is so crucial in any economy at large.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background of the Study    
Statement of the Problem    
Objectives of the Study    -    
1.4     Research Questions    -
1.5     Research Hypothesis
1.6     Significance of the Study    -    -
1.7     Scope and Limitation of the Study    -    
1.8     Organisation of the Study
CHAPTER TWO:LITERATURE REVIEW
2.0.   Introduction    -    -    -
2.1.   Review of Conceptual Literature    
2.2.   Review of Theoretical Literature    
2.3.   Review of Empirical Literature    -
2.4    Overview of Investment in Nigeria    -
2.5    Overview of Fiscal Policy in Nigeria    
2.6    Overview of Monetary Policy in Nigeria    
2.7    Instruments of Monetary Policy in Nigeria    -
2.8    Instruments of Fiscal Policy in Nigeria    
CHAPTER THREE: THEORETICAL FRAMEWORK, MODEL SPECIFICATION AND RESEARCH METHODOLOGY
3.1. Theoretical Framework    -
3.2Research Method-    -
3.3 Method of Data Analysis    -    
3.4 Model Specification    
3.5. A-priori Expectation    -
CHAPTER FOUR:  PRESENTATION AND ANALYSIS DISCUSSION OF RESULT
4.0. Introduction    -
4.1. Trend Analysis    -    
4.2 Empirical Analysis    
4.3 Presentation OfOLS Result    
4.4 Interpretation of Regression Result    
CHAPTER    FIVE:SUMMARY, RECOMMENDATIONS, POLICY IMPLICATION OF FINDINGS AND CONCLUSION
5.1. Summary    -    -
5.2. Recommendations    
5.3. Conclusion    -
BIBLIOGRAPHY    -
APPENDIX I    -    
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
   Fiscal and monetary policies are used in various combinations to direct a country's economic goals. Often, they are referred to as "sister strategy policies" through which the central authority can direct money supply in the economy. Although these two policies aim at arriving at similar goals or macro-economic objectives, the process of achieving set goals differs considerably.
   Monetary policy refers to any conscious efforts or 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).
   Actions such as modifying the interest rates, buying or selling government bonds and changing the amount of money banks are required to keep in their vaults- known as bank reserves- can be undertaken by the monetary authorities to influence money supply in the economy. In Nigeria, the Central Bank of Nigeria (CBN) is the apex monetary authority in charge of takin such actions. For example, the central bank or monetary authority may adopt expansionary monetary policy to increase or expand money supply in the economy, and on the other hand, contractionary monetary policy may be used to reduce money supply in the economy when need be.
   Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. Fiscal policy is based on the theories of British economists, "John Maynard Keynes", also known as "Keynesian economics", this theory basically States that government can influence macro-economic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when between two or three percent), increases employment, investment and maintains a healthy value of money.
   Fiscal policy is very important to the economy. For example, in the US in 2012, many worried that fiscal cliff- a simultaneous increase in tax rates and cuts in government spending- set to occur in January 2013, would send the US economy back to recession. The US Congress then avoided this problem by passing the American Tax Payer Relief Act of 2012, in January 1, 2013.
   The idea, however, is to find a balance between changing tax rates and public spending in order to affect all or most segments of the economy positively. For example, stimulating a stagnant economy by increasing spending or lowering taxes more than desired, runs the risk of causing inflation to rise. This is because, an increase in the amount of money in the economy, followed by an increase in consumer demand can result in a decrease in the value of naira. This implies that more money would be needed to buy something that has not changed in value.
   Let us say that an economy has slowed down and government takes relative measures to fuel it back up. With more money in the economy and fewer taxes to pay, consumer demand for goods and services increases. This in turn, rekindles businesses and turns the wheel around from stagnant to active and hence, promoting economic growths and investment in the country. This would only occur if the right actions, policies and programs are implemented and in the right dosages.
   Now, it is evident that investment in any business, firm or enterprise depends highly on the economic performance of that enterprise and also on general economic performance. Investment by economists refers to the production of goods that will be used to produce others goods. It is also the amount purchased per unit time of goods, which are not confused at the present time. It is a major component of GDP. On its back, humans have ridden from caves to sky scrapers. Its surges and collapses are still a primary cause of recessions. Investors must have a basic understating of monetary and fiscal policies, as it can have a significant impact on investment port folios and net worth.
   For example, with accommodative monetary policy and interest rates at low levels, real estate tends to do well, since home owners and investors will take advantage of low mortgage rates to snap up properties. Also, commodities are the quintessential "risky assets" and they tend to appreciate during periods of accommodative policy for a number of reasons. Risk appetite is stoked by low interest rates, physical demand is robust when economies are growing strongly, and unusually, low rates may lead to inflation concerns percolating below the surface.
   However, capital markets are influenced by fiscal policy in certain ways: Government spending and tax policy will generate either a budget surplus or a deficit, which work in turn to mean that the government sector will either contribute towards financing investment or "crowd out" private investments.
   Current fiscal policy impacts the amount of taxes that future citizens will pay. If the government runs up long term budget deficits, then future generations will need to pay higher taxes in order to pay the interest. In order to encourage private investments, government would have to work on chronic deficits, which lead often to high interest rates.
   Finally, monetary and fiscal policy changes can have a significant impact on both public and private investment in Nigeria. But by being aware of the nuances of these policies, investors can position their port folios to benefit from policy changes and boost returns. There is therefore, the need to research on and analyze the impacts of these policies on investment in Nigeria.
1.2 STATEMENT OF THE PROBLEM
   One of the major objectives of fiscal and monetary policies in a developing economy is encouraging investment. They should aim at curtailing conspicuous consumption and investment in unproductive channels. But despite the various efforts adopted by the Central Bank and also the government, inflation as well as chronic price and interest rate fluctuations, have been major hampers of investment activities in Nigeria and this can be found in studies conducted between 1974-1979 in Nigeria. Having registered low rates of inflation in the year immediately after independence, the country experienced double digit inflation in 1960. This was as a result of the civil war. The next period of high inflation was when the wage freeze was discontinued as recommended by Udoji salary review commission. But some influential studies suggest that bother monetary and fiscal policies promote investment, while a sizeable number have shown that both fiscal and monetary policies have no significant effect on investment. This study attempts to bridge this gap in literature, using time series data obtained from the Nigerian economy.
   The main thrust of this study is to explore the impact of both fiscal and monetary policies on investment.
1.3 OBJECTIVES OF THE STUDY
   The general objective of the study is to analyze the effects of fiscal and monetary policies on investment in Nigeria. Specific objectives include:
a) To examine the relationship between interest rate and investment in Nigeria.
b) To examine the relationship between government expenditure and revenue on investment
c) To appraise the impact of money supply on the level of investment in Nigeria.
d) To find out whether output size (GDP) affects investment in Nigeria.
1.4 RESEARCH QUESTIONS
   In a bid to analyze the impact the impact of fiscal and monetary policies on investment, the formulated research questions are:
a) What is the relationship between interest rate and investment?
b) How does government expenditure affect investment?
c) What is the relationship between money supply and investment in Nigeria?
d) How does GDP growth rate affect investment in Nigeria?
1.5 RESEARCH HYPOTHESIS
  The following are the formulated hypotheses to be tested in the later part of this study.
H1: There is no significant relationship between interest rate and investment
H2: There is no significant relationship between government expenditure and investment
H3: Money supply has no significant relationship on investment.
1.6 SIGNIFICANCE OF THE STUDY
   The significance of this study lies in the fact that the work will expose the extent to which monetary and fiscal policies have affected investment in Nigeria, and hence economic growth. This work will be relevant to the government, monetary authority (CBN) and investors as a whole, directing them on how to make maximum returns. It adds to the already exciting literature on investment in Nigeria. It is interesting to know that investment is one of the shortest routes to economic developmental.
1.7 SCOPE AND LIMITATION OF THE STUDY
   The researcher tends to find out the impact of monetary and fiscal policies on investment in Nigeria. This study is limited by time, finance and data availability.
1.8 ORGANISATION OF THE STUDY
   Following this introductory part, chapter two contains a review of related literature, while chapter three discusses theoretical framework and model specification. Analysis of empirical results is presented in chapter four, while chapter five contains the summary of findings, conclusion and recommendation.