Empirical Analysis of Balance of Payment Adjustment Mechanisms: Monetary Channel in Nigeria, 1970– 2010

Abstract

This study attempt is toward understanding the application of monetary approach as adjustment mechanism to correct balance of payments dis-equilibrium. It examined the review of empirical studies of the theory in Nigeria, explained the observed behavior of Nigeria’s balance of payments. It also aimed at the verification or refutation of monetary theory in Nigeria’s balance of payments adjustment mechanisms, given that any theory irrespective of its elegance in clarification or its sound logical reliability cannot be established and generally accepted without some empirical testing. The study was piloted via linear regression analysis using data from 1970 to 2010. The estimated result shows a positive relationship between the dependent variable (Balance of Payments) and the Independent variables (Domestic Credit, Exchange Rate andBalance of Trade)while (Inflation Rate and Gross Domestic product) are otherwise. It concludes that though not entirely, monetary measures constitute immensely to the position of BOP, cause disturbances and also serve as adjustment mechanism to bring BOP to equilibrium depending on it application and policy mix by monetary authority. However, it recommends that the government through Central Bank of Nigeria (CBN) should apply expenditure reducing monetary policies through money supply and domestic credit to promote favourable BOT which invariably stabilizes BOP.

DOI: 10.5901/mjss.2014.v5n14p67