Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.5, No.1, 2014 11 Behavioral Pattern of Monetary Policy Variables and Effects on Economic Growth: An Econometric Investigation of Nigeria. Ebiringa, Oforegbunam Thaddeus *1 ; Onuorah Anastasia Chi-Chi 2 and Obi, Henry Kenedunium 3 1. Department of Management Technology, Federal University of Technology, Owerri, P.M.B. 1526 Owerri, Nigeria. 2. Department of Accounting, Banking and Finance, Delta State University, Asaba Campus, Nigeria. 3. EcoBank Nigeria Plc, Orlu Imo State Nigeria *otebiringa@yahoo.com ABSTRACT This paper established that interest rate, inflation, and money supply had negative effects on Nigeria’s economic growth in the short run, while in the long run; exchange rate had significant positive effects. A combination of Breusch-Godfrey Serial Correlation, White Heteroskedasticity, Ramsey Reset, Dickey-Fuller unit root was used for preliminary analysis. Ordinary Least Square (OLS) was used for short run estimate, while a combination of Johansen Co-Integration, Granger Causality Tests and impulse response analysis were used for long run estimation. Our model shows that the four monetary policy variables have 88% joint probability of affecting level economic growth as well as explained 84% of economic growth Nigeria experience for the period 1980- 2012. The paper concludes that for sustainable economic growth to be achieved, monetary authority must devise short term strategies to manage periodic volatility in interest rate, money supply and inflation, while medium and long term strategies must be adopted to stabilize the value of the domestic currency. Keywords: Economic growth, monetary policy, interest rate, inflation, money supply, exchange rate. 1.0 Introduction Monetary policies implemented in recent years in Nigeria have been aimed at fast tracking economic reform programmes with the objective of providing enabling financial system infrastructure and environment to support sustainable economic growth. The Central Bank of Nigeria (CBN) at different times has used direct and indirect approaches to address key problems of instability in interest rate, exchange rate regimes which are believed will have direct effects on money supply and inflation and productivity in the short run and in the long run will affect rate of economic growth (Chimobi and Uche, 2010). It must be noted that the effectiveness of a monetary institution like the CBN can only be measured from the perspective stability in interest rate, exchange rate, money supply, inflation in the short term and rate of economic growth in the long run. Ajie and Nenbee (2010) posit that monetary policy - the act of controlling the supply or price of money - may exert a powerful influence over the economy. Ajisafe and Folorunso (2002) believe that macroeconomic policies in developing countries, Nigeria inclusive, are designed to stabilize the economy, stimulate growth and reduce poverty. Monetary policy formulation is based on the duo of money supply and credit availability in the economy. In ensuring monetary stability, the CBN implements policies that guarantee the orderly development of the economy through appropriate changes in variables that influence money supply using such instruments as the cash reserve requirement, liquidity ratio, open market operations to influence credit operations of banks and movement of reserves (Masha et al., 2004). One may be tempted to conclude that the use of monetary policy variables in Nigeria seems not to have led to the desired level of economic growth given the dismal performance of the economy in recent years. Little wonder Donli (2004) insist that the last two decades witnessed series of reforms aimed at the revitalization of the Nigerian economy owing to series of crises that had negative effects on the growth of the economy. Some have seen the problems low growth rate of Nigerian economy as a direct derivative of structural imbalances in the monetary system. Donli (2004) contends that these structural defects consisted of undiversified monolithic and monoculture production base and public revenue sources (undue reliance on agricultural products from 1960s and a total shift to exclusive reliance on petroleum since 1973). The outcome of these events as it relates to Nigeria has been that economic growth has relied more on external drivers than on internal factors. The objective of this paper therefore is to diagnose the behavioral pattern of selected monetary aggregates as it relates to their use as critical monetary policy drivers for economic growth. This paper significant given that monetary policy has remained a critical vehicle used by government to implement Nigeria’s economic transformation programme. In 1980 (austerity measures) was introduced which metamorphosed into Structural Adjustment Programme (SAP) of 1985and Vision 2000 of 1996 and the most recent being Vision 20-2020 and FSS 20-2020, whose objective is to put Nigeria on the path of being one of the twenty leading economies of the world come year 2020. Findings made in this paper provides the much needed