Monetary Policy and Domestic Private Investment in Nigeria

This paper empirically examined the effect of monetary policy on domestic private investment in Nigeria from 1981 to 2018. In other to achieve our objectives, annual time series data of the dependent variable – domestic private investment (DPI) and independent variables – money supply (MS), government domestic debt (GDD), government domestic savings (GDS), interest rate (INT) and consumer price index (CPI) were collected from secondary sources like CBN Statistical Bulletin and WDI. Thereafter, the data were analyzed using descriptive statistics and the econometrics technique of Vector Error Correction Mechanism (ECM) method of analysis. The results of analysis indicated that a long run relationship exists among the variables. Furthermore, the paper revealed that money supply (MS), government domestic savings (GDS). interest rate (INT) and consumer price index (CPI) have a negative and insignificant effect on domestic private investment in the long run but interest rate is significant at 5%, while government domestic debt (GDD), has a positive and insignificant effect on domestic private investment (DPI) in the long run in Nigeria within the period. Based on the above findings, the paper recommends as follows: Expansionary monetary policy should be formulated that will reduce interest rate, encourage borrowings and savings. This will expand commercial banks and other credit granting financial institutions which will encourage real investment in the economy.


INTRODUCTION
Monetary policy is the Macroeconomic policy laid down by the Central bank as a major economic stabilization weapons designed to regulate, control the volume, cost and availability and direction of money and credit in an economy to achieve some specific macro-economic policy objectives. Anyanwu (1993), stated that the control of money and Banks credit thereby regulating cost of credit in such a way that it will affect aggregate demand in a direction that would continue to the achievement of healthy balance of payment, price stability and job opportunity. Therefore, to achieve these broad objectives, the monetary authority (Central Bank) deliberately comes up with the monetary policy as one of the policy measures. The behaviour of the monetary sector can be influenced by the monetary policy. This is because changes in the behaviour of monetary sector influences various monetary variables or aggregates (Nzottta, 2014). This implies that, when monetary policy is in force, it will affect the level of money supply by either expanding or through contraction. The level and the structure of interest rate are also influenced by the monetary policy. To support this, Khan (2010), argues that monetary policy objectives are concerned with the management of numerous monetary targets which include; boosting growth, attaining full employment, stabilizing price, averting economic crisis, stabilizing real exchange rate and interest rates. It is clear that these objectives are all not consistent with each other, it depends upon the one assigned by monetary authorities or country priorities. It is observed that more attention is given to lowering inflation and price stability. Monetary policy as a tool of economic stabilization was given impetus by Milton Friedman who held that only money matters and as such monetary policy is a more potent instrument of stabilization than fiscal policy in Nzotta (2014). Friedman followers were known as monetarists. Their emphasis is on the role of money in explaining short-term changes of national income. That is changes in money supply causes change in national income. More so, the monetarists believe that all recessions and depressions are caused, by severe contraction of money and credits, while booms and inflation are caused by excessive increase in the money supply, (Jhigan 1980). Investment is a component of aggregate demand. Iyoha, (2004), emphasize that, it is the most volatile component of aggregate demand and fluctuation in its level is highly correlated with fluctuation in Gross National Product known as business cycle. Real investment can be classified as private and public, while public investment is autonomous; private investment is determined by IJMRA, Volume 4 Issue 7 July 2021 www.ijmra.in Page 905 monetary and macroeconomic variables in the economy. Financial investment being an avenue to create wealth is different from real investment, which increases the productive capacity of the economy, create employment and expand production beyond national consumption, a prerequisite for economic growth, full employment, price stability and external balance. Domestic investment is a tool for measuring the level of Gross Domestic product (Amer, Umer and Mohammad, 2014). Domestic private investment play key role in increasing capital formation and brings about long run economic growth. Through the control of monetary policy targets, such as the price of money (interest rate both short term and long term), the quantity of money and reserve money amongst others; monetary authorities directly and indirectly control the demand for money, money supply, or the availability of money and hence affect output and private sector investment (Tobias and Manbo, 2012). Thus, monetary policy that facilitates credit to private sector investment encourages the growth of private investment, whilst tight monetary policy that restricts credit to businesses discourages private sector growth. From the above the study tends to examine the effect of monetary policy on domestic private investment in Nigeria for the period 1981 -2018. However, the rest parts of the paper are as follow: Section two discusses conceptual, theoretical and empirical studies on the effect of monetary policy on domestic private investment, section three discusses the methods adopted in the study, section four present and analyse result, while section five concludes and make recommendations from the findings.

REVIEW OF RELATED LITERATURE
This section takes care of the conceptual and theoretical frameworks as well as the review of empirical studies that are deemed relevant to this study

2.1
Conceptual Framework Investment is a key macroeconomic variable necessary for economic growth and development of every country. It comprises of both private investment and public investment. However, developing countries have placed emphasis on the improvement of the private sector, since it is the main engine room for economic growth across the globe. In Nigeria government over the years has introduced several measures to naturalize the private sector and thus economic growth. Accord to IMF County Report (2011), for Country to have accelerated economic growth and development, it seeks nothing more than 20% of natural business to be in the hand of the state, and the rest, although operated mostly informally, in the hands of private sector. Meanwhile, Domestic Private Investment is classified as Gross Domestic Private Investment and Net Domestic Private Investment. Gross Private Domestic Investment is the measure of physical investment used in computing GDP in the measurement of nation's economic activity. This is an important component of GDP because it provides an indicator of the future productive capacity of the economy. (Wikipedia). Net Private Domestic Investment: Expenditure on capital goods to be used for productive activities in the domestic economy that are undertaken by the business sector during a given time period, after deducting capital depreciation. In general, capital depreciation was between 50 to 85 percent of gross investment. On the other hand, monetary policy is defined as "any policy measure designed by the Federal Government through the CBN to control cost availability and supply of credit (CBN, 2009). Monetary policy deals with discretionary control of money supply by the monetary authorities (Central Bank with Central Government) in other to achieve stated or desired economic goals. Governments try to control the money supply because most governments believe that its rate of growth has an effect on the rate of inflation. Hence monetary policy comprises those government actions designed to influence the behaviour of the monetary sector. Jhingan (2005) defined it as the use of money supply to regulate the level of economic activities in a country. Monetary policy is essentially a programme of action undertaken by the monetary authorities generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals (Dwivedi, 2005). Monetary policy consists of a Government's formal efforts to manage the money in its economy in order to realize specific economic goals.

2.2
Domestic Private Investment and monetary policy in Nigeria Nigerian government early 1960s and up to 1985 was involved in direct productive activities while encouraging private sector investment. At that time government took control of the economy with the hope of accelerating the growth process. With the increase in oil revenue inthe middle of 1970s brought in the needed financial resources. Government, therefore, went beyond the role of providing an enabling environment by establishing and owning companies in all sectors of the economy. The structural adjustment programme (SAP) in 1986 was established with the objective among others of facilitating the development of the private sector, whose role could determine the level of economic growth of the Nigerian economy. However, the expected investment boom after structural adjustment programme was not feasible and not much was recorded in terms of domestic IJMRA, Volume 4 Issue 7 July 2021 www.ijmra.in Page 906 investment. The Domestic Private Investment (DPI) share of the Gross Domestic product (GDP) is still below 10 percent and the ratio has since being decling (Apkokodije, 1998). Government's policy response in form of trade reforms and other macroeconomic reforms with the hope of promoting and encouraging domestic private investment still remains disappointing. In 2007, then president of the federal Republic of Nigeria, President Umaru Musa Yaradua on realizing the need for increased, private domestic investment in the economy encouraging the Organized private sector (OPS) to expand its domestic investment. He also stressed the need for the banking sub-sector to play a more visible role in supporting the growth of the real sector of the economy and promoting a vibrant capital through the provision of financial credit to local industries for the processing for export earning, thereby will lead to economic growth.
Monetary policy is one of the policies that government influences the money supply through adjustment of the interest rate, bank reserve requirements and the sale of government securities and foreign exchange. Monetary policy can either be contractionary monetary policy is the use of monetary tools to reduce money supply or raise interest rate. By so doing it will crowd out domestic private investment because of the cost of borrowing. This will then lead to low productivity and unemployment in the economy. Expansionary monitory policy is aimed at increasing money supply or to reduce interest rate thereby encouraging domestic private investors because of reduced cost of borrowing in the economy. Accommodative policy tends to lower the cost of capital in order to stimulate economic activities and engender economic growth, while monetary policy is neutral when such policy is not targeting the expansion of economic activities nor reducing inflation. The Central Bank of Nigeria (CBN), founded in 1958, through its activities and the monetary policy committee (MPC) is responsible for monetary and credit policy in Nigeria. The monetary policy has seen two major regimes known as the direct control (pre 1986) and indirect control (post 1986). The former focused on direct monetary controls and the later issues market mechanism approach (known as indirect control) using several monetary instruments (Central Bank of Nigeria 1986 and Ikhide, 1996).

Theoretical Framework
This study is knotted on IS-LM Model theory of Hick-Hansen 1970s and Milton Friedman (1959) as it linked to the long existing debate of the monetarists view (based on quantity theory of Money) and the Keynesian view (based on 'General theory of money' orbasic Keynesian model). However, the linkage of these theories to the study is briefly explained below: The IS-LM model The investment and savings, liquidity and money (IS-LM) model presents a suitable model to explore the effects of monetary policy on private domestic investment while capturing the interplay of variables, where private sector investment is determined by five key variables such as money supply, interest rate, government domestic savings, government domestic debt and inflation. The IS curve shows combinations of interest rates and level of output where planned spending is equals to income. Also, the LM curve or money market equilibrium represents the combination of interest rate and levels of income where demand for real balance is equal to the supply. Along the LM curve, the money market is in equilibrium, Dornbusch et al (2004).. The IS-LM model attempts to explain a way to keep the economy in balance through equilibrium of money supply versus interest rate.

2.3.2
Monetarist Theory The monetarists championed by Milton Friedman (1959) emphasize the importance of controlling the money supply to control inflation and manage aggregate demand. The monetarists are generally critical of expansionary fiscal policy, arguing that it will cause just inflation or crowding out and therefore fiscal action is not helpful, adding that the market forces work better when left to themselves. Government intervention can often times destabilize things more than they intend to help. The Monetarists advice and suggested laissez faire in the system. The theoretical foundation of the monetarist is the quantity theory of Money also believing that the economy is inherently stable. Monetarism's essence can be stated in the form of a few central propositions where the over-whelming influence of money is the center piece. Monetarists assign causal role to money, and since money is treated by them as exogenous it is possible to control disturbance or disequilibrium in the economy by controlling the money supply, and hence money matters. Furthermore, monetarists are of the view that money and income are directly correlated. Anyanwu (1996) has it that, monetary change affects long-run stock of real capital and hence output-Fluctuation in money, national income is attributed largely on monetary policy whose effect is transmitted to national income both through the bond field and other channels. Therefore, the monetarists conclusion can be reached without a vertical LM curve since, the LM curve continuously moves and affects income and activities in the long-run unlike the IS-curve which shifts in a once-for all form in the short-run. Thus, to the monetarists, the demand for money is stable than the Keynesian consumption function.

2.3.3
Classical Theory on Private Sector Investment This theory emphasizes how private sector investment is negatively affected by changes in monetary policy such as government domestic debt. This situation created a competition with the private sector for scarce loanable funds available in the economy.
IJMRA, Volume 4 Issue 7 July 2021 www.ijmra.in Page 907 That is to say that when there is increase in government expenditure financed by changes in the monetary policy. It will decrease the ability of private sector investment to access funds for investment. The displacement of private sector investment by government borrowing was termed crowing out effect. Barro (1997) stated the two ways in which private sector investment can be displaced is either arising from on tax cut or increase in government consumption spending. This situation induces the increase in public debt which will cause the decline in private investment that may result from a tax cut financed by a government budget deficit and the decrease in private consumption and investment that resulted from an increase in government consumption respectively.

Keynesian Theory on Private Investment
The Keynesian believed in using fiscal policy to stimulate economic growth. This is achieved through the use of budget deficit. They assume that the economy is not at full employment and that the interest rate sensitivity of investment is low. Increase in government spending will in a little way increase interest rate whilst increasing output and income. The Keynesians also argued that government expenditures increase private investment due to the positive effect of government spending on the expectations of the investors. Their point is as a result of the multiplier effect where a change in government spending induces a greater change in output. Barro (1997) illustrates the point by explaining that in the Keynesians model an increase in aggregate demand leads to increased output, that entails more real income, hence a further increase in aggregate demand.

2.4
Empirical Review of Literature Payne (2005) employed Engle-Granger and error correction model (ECM) to study the relationship between savings and investment in Mexico over the period 1960 -2002.The study show that the savings and investment are co-integrated, thereby indicating low capital mobility in accordance with F. H hypothesis. However, the coefficient of error correction model is positive and statistically significant with a binding inter-temporal budget constraint and an adjustment parameter of 0.242. Narayan (2005) studied the relationship between investment and saving for the period 1960 -1999 by applying. Autoregressive Distributed lag (ARDL) model and Granger causality test for Japan. The author found long run relationship between savings and investment which suggest that there must be granger causality in at least one direction. Therefore, the Granger causality test results suggest bidirectional causality relationship between savings and investment. Thus, lending support to Feldstein and Horioka (1980) hypothesis. Zulkefly (2010) search the impacts of monetary policy on institutions investment in Malaysia, the study used dynamic neoclassical framework in an autoregressive distributed lagged (ARDL) mode, the study showed the impact of monetary policy on institutions investment spending, the study also reveals that the impact of monetary policy channels to the institutions investment are heterogeneous, therefore the small institutions that faced financial constraint responded more to monetary tightening as compared to the large institution. Bakare (2011) carried out empirical of the consequence of the foreign exchange rate reforms on the performances of private domestic investment in Nigeria adopting the ordinary least square multiple regression analytical method. The multiple results showed a significant but negative relationship between floating foreign exchange rate and private domestic investment in Nigeria. The findings and conclusion of the study support the need for the government to dump the exchange regime and adopt purchasing power parity which has been considered by researchers to be more appreciate in determining realistic exchange rate for naira and contribute positively to macroeconomic performance in Nigeria. The Interest rate (IR) is only significant with INF. CD is significant at 0.01 level of significance with P1, MS, EXR and GDP. INF is significant with IR. Money supply was found to be effective monetary policy instrument than interest rate. This is based on the fact that private investment react more to changes in money supply than interest rate in Nigeria, however, the correlation result showed that private investment increase as money supply increase. Nazar and Bashiri (2012) investigate the relationship between real exchange rate uncertainty and private investment in Iran for the period of 1988 to 2008 by suing quarterly data and applying bivariate generalized autoregressive conditional heteroscedasticity (Bivariate GARCH) model in the Iranian economy. The study reveals that real exchange rate uncertainty significantly influence private investment and has a negative effect on it and that private investment uncertainty affects the level of private investment negatively. Tobias  . The result suggest that money supply and gross domestic saving exert positive and statistically significant effect on private sector investment, whereas treasury bill rate inflation and gross debt exert a negative effect. The analytical framework of this study imitates the previous studies such as Lucky and Uzah (2017) with further modification. Lucky and Uzah (2017), who studied monetary policy mechanism and Domestic Real Investment used Domestic real investment as dependable variable, while credit to private sector, exchange rate, Interest rate, interest rate channel (MPP), Prime lending rate, net domestic credit, saving rate, Treasury bill as independent variable. But the present study deviates from these scholars by looking at monetary policy on domestic private investment using Domestic Private Investment (DPI) as dependent variable and government domestic debt, government domestic saving, money supply, Interest rate, Inflation as independent variables.

The Model
The study will follow a simple linear specification of the multivariate time series function using the partial adjustment approach to estimating given parameters of a model. In so doing, the vector error correction model (VECM) shall be used. The VECM will help to capture the long run dynamics of monetary policy and domestic private investment variables (See Engle and Granger, 1987). The model is given as: The constant term = The parameters of the estimates = The error terms Dependent variable response to the set of the explanatory variables in the above model may not be automatic, in other words, it is rarely instantaneous. Sometime the dependent variable responds to the explanatory variables with a lapse of time (Gujarati, 2004). Hence, equation (2) transform into a dynamic model as follow: Where t-i = the lag length. We shall use Akaike Information Criteria (AIC) to determine the optimal lag length of the model. This method has gain prominence recognition among econometricians. There may be possibility of the model processing nuisance lag length after applying the AIC. If that occurs, we shall introduce Granger-marginalization procedure so as drop the redundant lag(s). This will make our model to parsimonious.

RESULTS AND DISCUSSIONS
In this section, the analysis of the results was conducted in five phases. It begins with the descriptive statistics analysis of the data and thereafter conducted the unit root test. Furthermore, co-integration and the long run estimation of the VECM were conducted.

Descriptive Statistics
The result of the descriptive statistics as presented in Table 1 below shows that, the standard deviation of MS was the most volatile in the series with a value of 7536.495 while INT was the least volatile variable with a value of 4.628256. The calculated values for the skewness statistic for all the variables -DPI, MS, GDD, GDS, INT and CPI were positively skewed. Again, the kurtosis statistics for MS and GDS were normally distributed while DPI, GDD, INT and CPI were leptokurtic meaning that their distributions were peaked relative to normal. Based on these observations, it therefore means that there is unit root (non-stationarity) in the series. Thus, estimating these variables at level might not give good results, hence, the need to conduct the unit root test. The unit root test is conducted to test whether or not the variables were stationary. The study adopts the Augmented Dickey Fuller (ADF) unit root tests procedures.

Unit Root Test
The results of the unit root test using the ADF at constant and trend as reported in Table 2 shows that DPI, MS, GDD, GDS, INT and CPI were stationary in their 1 st difference.

Johansen Cointegration Test
We used the Johansen approach to test if there exists, at least a linear combination of the variables with unit roots that is stationary. The Johansen tests revealed that the trace statistics show the existence of three cointegrating relationships between log (DPI) and its determinants at 5% level of significance ( Table 3). The conclusion drawn from this result is that there exists a unique long run relationship between log (MS), log (GDD), log (GDS), log (INT), log (CPI), and log (DPI). Table 5 below presents the estimated coefficients of the long run relationship between the variables in the model. The coefficient of the error correction term is statistically significant and carries the expected negative sign at both 5% and 1% level of significant. Hoverer, the speed of adjustment is fast, that is 104.15% of the adjustment to equilibrium domestic private investment is expected to occur in the long run. Further, this figure shows the average speed of adjustment of domestic private investment movement to its long-run change in the equilibrium conditions. This result indicates that ignoring error correction in non-stationary time series analysis would lead to misspecification of the underlying process to achieve domestic private investment stability in the Nigeria. As shown in Table 4, the current value of money supply negatively affects private domestic investment by 37% as well insignificant. But the first lagged value significantly influences the volatility of DPI over time with a strong inertia of 49%. This means that an increase in money supply in Nigeria will have a negative effect on the domestic private investment in the country. But the second lagged value of money supply have a positive impact on the level of domestic private investment (DPI) and is statistically significant at 5% level. Also, the current value of government domestic debt (GDD) significantly influenced domestic private investment (DPI) by 28% that is if government domestic debt (GDD) increase by one-unit, domestic private investment (DPI) will increased by 0.278 units. This is in consonance with the apriori expectation. But the first lagged value of GDD has a negative impact on domestic private investment (DPI) and as well insignificant at 5% level. Furthermore, the current and the third lagged value of government domestic savings has a negative influence on domestic private investment. But the current value of government domestic savings is insignificant but the third lag is statistically insignificant at 5% level. But the first lag of government domestic savings has a positive impact on domestic private investment (DPI) which is in agreement with our theoretical expectation and is statistically significant. The third lagged value of interest rate negatively influence domestic private investment (DPI) and is statistically significant at 5% level. This is also supporting our theoretical expectation. Finally, the second and third lagged value of consumer price index (inflation) have a negative and positive influence on domestic private investment. But the second lag is insignificant at 5%, while the third lag is statistically significant at 5% level.

CONCLUSION AND RECOMMENDATION
This paper empirically examined the effect of monetary policy on Nigeria's domestic private investment between 1981 and 2018 by employing vector Error correction mechanism (VECM) approach. Data for the empirical analysis were sourced from secondary sources like CBN Statistical Bulletin (Various-Issues) and WDI. The results of analysis indicated there is long run relationship among the variables (money supply, government domestic debt, government domestic savings, interest rate and consumer price index and domestic private investment). Furthermore, the study revealed that money supply (MS) government domestic saving (GDS) and interest rate (INT) have negative and a significant effect on domestic private investment both in the long run while government domestic debt (GDD), and consumer price index (CPI) has a positive and an significant effect on domestic private investment (DPI) in the long run in Nigeria within the period. In light of the above findings, the paper recommends as follows: IJMRA, Volume 4 Issue 7 July 2021 www.ijmra.in Page 912 1) Expansionary monetary policy should be formulated that will reduce interest rate, encourage borrowings and savings. This will expand commercial banks and other credit granting financial institutions which will encourage real investment in the economy.
2) The Central Bank of Nigeria should formulate policies that will enable deposit money banks provide loanable funds to the private sector at a low interest rate. Interest rate management and reactions to domestic real investment must be factored into the management and formulation of monetary policy in Nigeria and institutional and policy barriers to investment should be removed.