Monetary Policy and Agricultural Sector Performance in Nigeria: A Granger Causality Approach

Purpose: The agricultural sector provides a formidable basis for the Nigeria's economic diversification. To achieve this in the short-run, to start with, the use of appropriate monetary policy instruments is indispensable. Hence, this study examined the short-run causality between monetary policy and agricultural sector performance. Methodology: Time series data for the study were obtained from the Central Bank of Nigeria between 1981 and 2020. The monetary policy instruments in the model were money supply (MS), monetary rediscount rate (MR), exchange rate (ER), prime lending rate (PR) and agricultural sector implicit price deflator (ASI) while agricultural sector performance was proxied by the gross domestic product for the sector. After first differencing, the Augmented Dickey-Fuller test confirmed the stationarity of the variables. Optimal lag selection-order recommended four lags. The vector autoregressive model, pairwise Granger causality test and Wald coefficient test were used to show the robustness and validation of the causality test. Findings: The result shows that the t-statistics of LnMS (2.70), LnMR (3.00), LnER (2.05) and LnPR (3.53) were statistically significant (p<0.05), suggesting bidirectional relationship between monetary policy and agricultural sector performance. There was a unidirectional causality running from LnASI to LnASG. It was concluded that monetary policy Granger-caused agricultural sector performance in the short-run. Unique contribution to theory, policy and practice: The study recommended that monetary authorities should note that that changes to MS, MR, ER, PR and ASI would affect ASG and vice versa in the short-run as well as the overall macroeconomic growth; and policy decisions that are aimed at altering ASG would affect MS, MR, ER, PR.