Testing long-run neutrality propositions in a developing economy: the case of Nigeria

Abstract

Following the eclectic methodology by King and Watson (1997), the paper uses post independence quarterly data to examine the validity of two long-run neutrality propositions in Nigeria. Overall, there is qualified evidence that suggests the existence of longrun monetary neutrality and evidence that refutes the existence of the long-run Fisher relation between prices and interest rates. The evidence on long-run monetary neutrality is qualified because it holds under assumptions of contemporaneous money exogeniety and contemporaneous money neutrality. As a consequence, our results inform our deductions about the ineffectiveness of the Monetarist anti-inflationary prescriptions for managing the macroeconomy of a developing economy like Nigeria. Pursuing a synchronized and coordinated fiscal-monetary policies framework is likely to yield the desired results on real economic variables.