The Manufacturing Sector Impact of Monetary Policy Frameworks: Evidence from Nigeria

Monetary policy as macroeconomic tool is germane to maintain economic balances and stimulate sectoral growth. However, the channels through monetary policy influenced manufacturing sector has not been adequately explored in Nigeria. Therefore, this study was carried out to uncover the linkage between monetary policy channels and manufacturing sector output in Nigeria within the period of 1986 to 2018. The unit root result based on Augmented Dickey-Fuller and Phillips-Peron tests showed the data series are integration of level and first difference. Data were analyzed with Autoregressive Distributed Lag-Bound Co-integration dynamic technique. It was discovered from the study that, monetary policy channels determines manufacturing sector output in the long run. It was further established that, manufacturing sector output responded positively and significantly to momentary policy rate, broad money supply and inflation rate while cash reserve ratio and exchange rate had negative and insignificant relationship with manufacturing sector output in the long run coefficients with mixed effects in the short run coefficients. These results suggest that, monetary policy channels are powerful tool for influencing manufacturing sector output and promoting sectroal growth especially in the long run. Thus, it was suggested that the current monetary policy frameworks should be maintained and sustained, while cash reserve ratio of banks should be reviewed to support lending to the manufacturing sector. The growth of money supply should be adequately monitored and controlled in line with the structure of the economy. Finally, appropriate and stable macroeconomic policies should be initiated to ensure macroeconomic stability capable of supporting manufacturing sector activities.


Introduction
Achieving sustainable growth and development remain one of the major focus of governments globally. Government mainly stimulate the development of real sector of the economy because, this sector can contributes significantly to economic growth through different macroeconomic policies. Monetary policy as a macroeconomic framework is employed by the monetary authority to control and regulate level of economic activities. It is a macroeconomic policy used to control and regulate the level of economic activities (Epstein, 2007;Wulandari, 2012Osinowo, 2015Nguyen, 2020). According to Vizek (2006); Ezeaku, Ibe, Modebe, Ugwuanyi and Agbaeze (2018), monetary policy is used to control the cost, value, quantity and availability of credit to achieve macroeconomic objectives of price stability, employment creation and output growth.
One of the major sectors in which monetary policy is being used to stimulate, is the manufacturing sector. The manufacturing sector is an important sector in a modern economy and has long been recognized as the tool of industrialization. The sector has the capacity to transform the economy through the utilization of economic resources to generate income and wealth. Simbo, Iwuji and Bagshaw (2012); Adekunle (2019) thus averred that, the manufacturing sector serves as the driver of growth and mechanism of economic transformation in countries like China, India, Malaysia, North Korea, Germany, Asian Tigers, South Africa, and Singapore.
Globally, concerted efforts have been made to revamp the manufacturing sector through technological innovation, stable macroeconomic environment and viable financial system that can support the growth aspiration of the sector. However, effective macroeconomic policy is needed to achieve industrialization of the manufacturing sector. Ganley and Salmon (1997). Leith In Nigeria, increasing the productivity of the manufacturing sector remains an important focus of government in the recent years. This is because the sector is perceived to be a leading non-oil sector capable of diversifying the economy and creating much needed contributions through employment creation, income distribution, poverty alleviation and export promotion in the economy. Thus, Imoughele and Ismaila (2014); Shobande (2019) opined that, in order to position the Nigeria manufacturing sector for the purpose of leading economic transformation, monetary authority have formulated diver monetary policy through different monetary channels to ensure that the manufacturing sector operate optimally in the economy. The monetary authority has tried to ensure the stability of exchange rate, price level and other macroeconomic variables which could influence the operation of the manufacturing sector.  Quite a number of studies have been conducted on the effect of monetary policy in Nigeria. However, few of these studies examined the effect of monetary policy on manufacturing sector without considering the monetary policy channel in their empirical model. Broad money supply was employed in previous studies without adopting the combination of monetary policy rate and cash reserve ratio alongside exchange rate as important channel of monetary policy for proper empirical analysis and policy frameworks. In light of the above gap and the recent efforts of the government to reposition the manufacturing sector as a tool of sustainable growth and development, this paper examined the effect of monetary policy frameworks on manufacturing sector in Nigeria. The paper is structured into introduction, literature review, data and method, findings, discussion and conclusion.

Literature Review
Monetary policy as a stabilization tool plays important role in improving sectoral and overall economic performance. Monetary policy stance through expansionary or contractionary frameworks are initiated through different channels like exchange rate and lending channel are adopted to control level of economic activities in different sectors ( Keynes (1936) stated that, monetary policy stimulates economic and sectoral activities through increase in money supply. Also, Matheson (1980) and Levine (1997) asserted sectoral and overall economic growth is determined by variation in stock of money through monetary policy. McCallum (2008) stated that, through the adoption of monetary policy instruments, the central bank influence money supply at constant growth rate to achieve sectoral performance.

Data and Method
This research was based on ex post facto research design to establish the relationship between monetary policy and manufacturing sector performance Nigeria. The ex post facto research design is considered appropriate because the data for the study are pre-existing data which are not manipulated or controlled. However, the data for the study were time series in nature covering the periods of 1986 and 2018 which were sourced from Central Bank of Nigeria Statistical Bulletin of different issues. Data on manufacturing sector output, monetary policy rate, cash reserve ratio, broad money supply, exchange rate and inflation rate were selected from the empirical studies of Ganley and Salmon (1997)

Model Estimations Techniques
The data series of the variables employed in this study are expected to be stationary with a mean of zero and constant variance to estimate time series data. Consequently, the time series properties of the data are checked by applying the Augmented Dickey-Fuller test which tested the null hypothesis of non stationary or unit root. The ADF test of stationarity follows the model below: The rule is that if the test statistic is greater than the 5 percent critical value, we accept the null hypothesis i.e. the variable is stationary but if the test statistic is less than the 5 percent critical value i.e. the variable is nonstationary, we accept the alternate hypothesis and go ahead to difference once. The outcome of the unit root test showed combination of level, I(0) and first difference, I(1) which promoted the adoption of a dynamic techniques by means of Autoregressive Distributed Lag (ARDL) technique. The Autoregressive Distributed Lag (ARDL) require that the variables are either stationary level, first difference or the combination of level or first difference (Pesaran & Shin, 1991). This technique was considered suitable because the data for the study is small and the technique can easily accommodate small sample size and solve the problem of endogeneity problem. Thus, the co-integration testing between monetary policy and manufacturing sector follows the approach of ARDL Bound test for long run relation given as: LMSOt = α01 + β1MPRt-1 + β2CRRt-1 + β3LBMSt-1 + β4LEXRt-1 + β5INFRt-1 + ∑ α1MPR The short run equation for the ARDL approach is given in equation 5: LMSOt = α0 + å p i=Iλ1DMPRt-1 + å p i=Iλ2DCRRt-1 + å p i=I λ3DLBMSt-1 + λ4DLEXRt-1 + å p i=I λ5DINFRt-1+ ECTt-1 + µt The long run equation for the ARDL approach is given as:

Unit Root Test Result
The data series for this study are tested for stationarity in order to determine their order of integrations and ensures that they do not contain unit root which may invalidate the results. For this purpose, Augmented Dickey-Fuller and Phillips-Peron tests are applied and reported in Table1 The summary of Augmented Dickey-Fuller and Phillips-Peron tests presented in Table 1 shows that monetary policy rate is stationary at level while log of manufacturing sector output, cash reserve ratio, log of broad money supply, log of exchange rate and inflation rate are free from unit root problem at first difference. This indicates that, monetary policy rate is integrated at level while log of manufacturing sector output, cash reserve ratio, log of broad money supply, log of exchange rate and inflation rate are integrated at first difference. This informs the adoption of autoregressive distributed lag technique as suggested by Pesaran and Shin (1991).

Co-integration Test Result
The long run relationship between monetary policy and manufacturing sector output is determine using ARDL Bound test. The test is conduced based on lag two as suggested by the Akaike Information Criterion. The cointegration result is shown in Table 2. The result of the long run relationship is presented in Table 2. The result shows that the calculated F-statistic value of 4.079156 is greater than 2.62 lower bound value at 5% significance level which suggest monetary policy has co-integration relationship with manufacturing sector output. This indicates that monetary policy has the capacity to simulate and cause movement in manufacturing sector output in the long run.

ARDL Coefficients Results
The ARDL short and long run coefficients results are presented in Table 3 and 4.  Table 3 presents the result of the short run effects of monetary policy rate, cash reserve ratio, log of broad money supply, log of exchange rate and inflation on manufacturing sector output. It shows that monetary policy rate has positive and significant effect on log of manufacturing sector output in Nigeria which implies that increase in monetary policy rate. It is revealed that cash reserve ratio has negative and insignificant effect on manufacturing sector output in the current period but positive and significant effect on manufacturing sector output at first period lag. Furthermore, the result shows that log of broad money supply has positive and significant effect on log of manufacturing sector output in the current period but negative and insignificant effect on log of manufacturing sector output in Nigeria at lag one. Furthermore, the result of the short run coefficient indicates that there is negative and insignificant relationship between log of exchange rate and log of manufacturing sector output. However, positive and significant relationship is established between inflation rate and log of manufacturing sector output in Nigeria. Finally, the co-integration equation which measures the speed of adjustment in the short run indicates a coefficient of -0.195130 which is significant at 5%. This implies that there is seed of adjustment in the model and any disequilibrium in the short run would be corrected at speed of 19% towards equilibrium. The result of the long run is pretested in Table 4. It shows that monetary policy rate has a coefficient of 0.122317 which implies that 1% increase in monetary policy rate causes 0.12% increase in log of manufacturing sector output in Nigeria. This implies that the adoption of expansionary monetary policy and stable monetary which is fixed at 14% over the years would produce increase in manufacturing sector productivity through increase in lending to the sector. Conversely, the result indicates that cash reserve ratio has negative and insignificant effect on log of manufacturing sector output in Nigeria. This implies that 1.0% increase in cash reserve ratio will lead to 0.04% fall in manufacturing sector output as reported in Table 4. This suggests that increase cash reserve ratio of commercial banks by monetary authority would constraints lending to the manufacturing sector and hence fall in output.
However, it is indicated that there is positive and significant relationship between log of broad money supply and log of manufacturing sector output with a coefficient of 1.002629 indicating that 1% increase in money supply in the economy would lead 1.0% increase in manufacturing sector output. This implies that the adoption of expansionary monetary policy through increase in money supply to stimulate economic activities would lead to increase in manufacturing sector output in the economy. Contrarily, log of exchange rate has negative and insignificant relationship with log of manufacturing sector output in Nigeria with a coefficient of -0.287319 which implies that 1% increase in exchange rate would lead to fall 0.29% fall in manufacturing sector output in Nigeria. This indicates unstable and highly depreciated naira exchange rate value would lead to fall in productivity of manufacturing sector through rise in cost of importing foreign materials for manufacturing activities. Finally, inflation rate was found have positive and significant effect on log of manufacturing sector output in Nigeria with coefficient of 0.013899 indicating that 1% increase inflation rate would lead to 0.01% increase in manufacturing sector output. Diagnostics and stability of the residual are reported in Table 5 and it is concluded that residual is normally distributed, has no serial correlation, is Homoscedatic and the model is best fitted and rightly developed.

Figure 2. Stability Test Result
Source: E-views, 9. The stability test is conducted based on the method proposed by Brown, Dublin and Evans (1975). The result of the Cusum of Squares presented in Figure 2 that the stability line falls the acceptance region of 5% indicating stability of regression estimate.

Discussion and Conclusion
Monetary policy serves as potent macroeconomic policy that can be used to either stimulate or correct imbalance depending on the nature of the economy. The policy has the capacity to enhance sectoral activities which informed the investigation on the effects of monetary policy on manufacturing sector output in Nigeria. Therefore, this study adopted times data covering the periods of 1986 to 2018 to determine the linkage between monetary policy and manufacturing sector output in Nigeria. Analysis was conducted using Autoregressive Distributed Lag Bound Co-integration technique and it was discovered that there is long run relationship between monetary policy and manufacturing sector output in Nigeria. The study found and concluded that monetary policy simulate manufacturing sector output in Nigeria which conformed with the theoretical preposition of Keynes (1936)