Welfare Effect of Monetary Financing

Abstract

This study ascertained the direction and asymmetric pass-through of central bank’s monetary financing to welfare in Nigeria using annual time series data covering the period 1970 to 2018. The study depended on both the Monetarist and Keynesian theoretical postulations to provide insights on the policy significance of monetary financing. To undertake the empirical analysis, the study applied both the linear Autoregressive Distributed Lag (ARDL) and non-linear ARDL (NARDL) technique. Unlike the ARDL equation, the estimated NARDL equation established that welfare losses respond negatively to both positive and negative changes in monetary financing; but the impact of negative monetary financing shock (7.11) is greater than the positive shock (2.87). In addition, the study found that it takes about 9 to 11 quarters for the changes in positive and negative monetary financing to fully release its effects on welfare loss. Besides, the results revealed that welfare loss is also driven by oil price, which is suggestive from oil price pass-through to domestic prices (exchange rate and consumer prices). The study, therefore, supports monetary financing in proper amounts and conditions to boost aggregate nominal demand but not to spur a fully-fledged monetary policy capture in the process.