Optimal Policy Mix for Inclusive Growth: Evidence from Nigeria

Abstract

Unresolved issues on choice of optimal policy mix for inclusive growth pose intractable problems to policy makers. Search for solution has continued in the present study which focused on extracting common or specific factor with proper combination of fiscal and monetary measures that could foster inclusive growth. Study spanned across 1980-2016. Data were sourced from Central Bank of Nigeria, National Bureau of Statistics, Abuja and World Development Indicators. Exploratory factor analysis technique was used to analyze the data. Results indicate that: (1) Optimal policy mix, compatible with inclusive growth, is expansionary fiscal-expansionary money which blended company income tax, recurrent expenditure, money supply, domestic debt, credit to private sector, custom and exercise duties, net loans and advances, exchange rate, federally collected revenue capital expenditure and petroleum profit tax in exact proportion of their respective regression weights (2) Decelerator policy mix undermined the effectiveness of optimal policy mix (3) Rising demand for money induced external borrowing which failed to impact significantly on growth. The study concluded that the determination of optimal policy mix that fosters inclusive growth justifies Keynes's MEC theory as a valid theoretical framework for the study. It was recommended, inter alia, that Macroeconomic Policy Committees be domiciled in finance ministries for effective coordination of fiscal and monetary policies.