MONETARY POLICY CHANGES AND UNEMPLOYMENT IN NIGERIA: EVIDENCE FROM SVAR MODELLING

Abstract

 This study investigates the impact of monetary policy changes on unemployment in Nigeria from 1981 to 2023, focusing on the role of key monetary variables such as interest rates, inflation and monetary aggregates (M2). Employing the Structural Vector Autoregressive (SVAR) model, the study analyses the dynamic relationships among these variables and their effects on unemployment. The findings reveal that monetary policy shocks, particularly changes in inflation and interest rates, significantly affecting unemployment in both the short and long run. Inflation shocks have an immediate negative impact on unemployment, while interest rate shocks exhibit a similar short-term effect. Additionally, M2 is found to play a crucial role in influencing inflation and, indirectly, unemployment. The study concludes that effective monetary policy can play a vital role in managing unemployment in Nigeria by targeting key macroeconomic variables. Based on these findings, the study recommends that Nigerian policymakers prioritise inflation control and interest rate stabilisation to reduce unemployment. Specific measures such as tightening the money supply through increased reserve requirements, adopting inflation targeting frameworks and using open market operations to manage liquidity are suggested. To stabilise interest rates, the Central Bank of Nigeria should maintain a consistent monetary policy stance and improve policy communication. Strengthening the financial sector and adopting counter-cyclical monetary policies are also recommended to mitigate the adverse effects of monetary shocks.