The Choice of Monetary Targets in Periods of Structural Adjustment: The Case of Nigeria.

This paper examines the choice of monetary targets in Nigeria since the introduction of the Structural Adjustment Program (SAP) in 1986. We employed cointegration vector error correction methodology using quarterly in order to ascertain if M2 targeting over M1 targeting was a prudent monetary policy rule. We tested for the stability of real M1 and real M2 money demand functions and found the former to be an unstable during the SAP period. Both the CUSUM and CUSUMSQ tests confirmed the stability of the short- and long run parameters of the real M2 money demand function but not for real M1. The stability of the real M2 money demand function supports its choice as an intermediate target. Furthermore, we found that the actual real M2 monetary growth deviated from the annual target rates, which indicated that the Central Bank of Nigeria did not strongly commit to its annual M2 money growth targets. Further tests showed that the deviations of actual real M2 growth from the annual target growth rates affected real GDP growth and inflation rate adversely during the period. [ABSTRACT FROM AUTHOR]