Social Sciences 2018; 7(3): 133-140 http://www.sciencepublishinggroup.com/j/ss doi: 10.11648/j.ss.20180703.14 ISSN: 2326-9863 (Print); ISSN: 2326-988X (Online) An Empirical Analysis of Effectiveness of Monetary and Fiscal Policy Instruments in Stabilizing Economy: Evidence from Nigeria Adewale Emmanuel Adegoriola Department of Economics, University of Abuja, Abuja, Nigeria Email address: To cite this article: Adewale Emmanuel Adegoriola. An Empirical Analysis of Effectiveness of Monetary and Fiscal Policy Instruments in Stabilizing Economy: Evidence from Nigeria. Social Sciences. Vol. 7, No. 3, 2018, pp. 133-140. doi: 10.11648/j.ss.20180703.14 Received: October 30, 2017; Accepted: May 8, 2018; Published: May 18, 2018 Abstract: This paper empirical study the effectiveness of monetary and fiscal policy instruments in stabilizing Nigerian economy from 1981 - 2015. The data were sourced from Central Bank of Nigeria, National Bureau of Statistics and World Development Index (WDI). The data was tested for stationarity using Augmented Dickey Fuller (ADF test while the co- integration was conducted using Johansen’s methodology. Error Correction Model (ECM) was employed for the empirical analysis. The results show that, there is long run equilibrium relationship between monetary and fiscal policy instruments and economic growth in Nigeria. ECM has the expected negative sign and is between the accepted region of less than unity. This was confirmed by the positive relationship between money supply, government expenditure and revenue while interest rate and budget deficit have negative relationship with economic growth. Therefore, it recommended that there should be effective use of money supply and government expenditure as key instruments of monetary and fiscal policy in Nigeria in order to improve the economy. Also, government annual budget implementation and execution of projects should be monitored to ensure that the objectives of the budget is achieved, which include price stability, economic growth, increase employment, income distribution among others. This can be done by eliminating corruption, leakages of resources and inappropriate use of resources. Interest rate should the reduced to one-digit to encourage borrowing, increase investment and output. These will bring the economy to a steady state. Keywords: Monetary Policy, Fiscal Policy, Economic Growth, Error Correction Model 1. Introduction The macroeconomic policy plays crucial role in providing sustainable and credible economic stability in a country, thus creating the environment for the fast economic growth. This task is primarily achieved through monetary and fiscal policies as its fundamental components. But, the necessary precondition for the successful functioning of an economy is the existence of coordinated activities of monetary and fiscal policies, since the absence of this coordination leads to a poor overall economic performance. Although these policies are conducted by two separate authorities, they are mutually dependent, and therefore, it is extremely important to accomplish a consistent and sustainable policy-mix framework, within which monetary and fiscal policies will be harmonized, to avoid possible inconsistencies [22]. While fiscal policy is mainly concerned with the public expenditures and revenues, monetary policy deals with the discretionary control of money supply. Namely, through fiscal policy instruments and measures, modern governments participate in almost every part of social and economic life by influencing aggregate demand and supply, attempting to create the full employment conditions and moderate inflation, leading the policy of stable foreign trade balance and supporting steady economic development. Additionally, prudent and sustainable fiscal posture promotes “non- inflationary economic growth, low and stable levels of fiscal deficit and public debt, reduction of budget imbalances in situations of high fiscal deficit and public debt” [12]. On the other hand, monetary policy is mostly focused on accomplishing stability of prices thus avoiding high inflation rates, stable and stimulating exchange rate resulting in positive balance of payment and satisfactory level of