IMPACT OF BROAD MONEY AND EXCHANGE RATE ON AGRICULTURAL GROSS DOMESTIC PRODUCT: AN UNRESTRICTED VAR MODEL APPROACH

Abstract

Expansionary monetary policy is a major driver of economic changes via money supply. Broad money, which represents total money supply in an economy, has several economic impacts. The study examines the impact of broad money (MS2) and exchange rate (XR) on agricultural gross domestic product (AGDP) in Nigeria. Secondary data from 1981 to 2018were obtained from the Central Bank of Nigeria. Descriptive statistics, Augmented Dickey-Fuller, Johansen Co-integration test and Vector Autoregression model were employed. Broad money had a large coefficient of variation. Variables were stationary at the first difference, supported by a spurious regression of d1lnagdp on d1lnms2 and d1lnxr whose R² (0. 2411) was greater than Durbin Watson statistics (1.889914). Johansen's Co-integration test rules out the long-run relationship. Using the AGDP model of the VAR, the result shows that the chi2 statistic (16687.39) is statistically significant (P<0.01), with an R² of 0.9978. Ms2 and XR have coefficients of 0.3389 and 0.2502, respectively, with statistically significant (P<0.01) and z-statistics of 3.92 and 5.44, respectively. The findings suggest increased broad money for increased agricultural gross domestic product. An increase in the exchange rate should be adopted for an increased agricultural gross domestic product but with caution to forestall the trade-off effect on inflation.