Response of self-owned businesses to monetary policy in a developing economy

Abstract

There is a wide consensus about the role of economic policy in attaining macroeconomic goals of high employment, price stability, and rapid economic growth. It is not clear, however, to what extent the monetary instruments can contribute to the development of self-owned enterprises. Monetary policy is one of the major policy tools for promoting business and investment once it is geared towards reducing unemployment. This study aims to assess the effect of monetary policy on self-owned enterprises in a developing economy, such as Nigeria. Based on the modern monetary theory which offers an alternative way of reaching full employment and price stability, the authors employ Toda-Yamamato-Dolado-Lutkepohl causality test to carry out an empirical analysis of the quarterly data for the period between 1991 and 2022. The effects of changes in the broad money and lending rates are similar. A unit broad money-related shock leads to little or no change in self-employment and there is a quick convergence to equilibrium. The paper provides robust empirical evidence revealing the effects of the two key monetary policy variables on self-owned business in a developing economy. For policy purposes it is important to point out that monetary policy does not directly affect self-owned businesses in Nigeria. It is concluded that monetary policy will be more effective in promoting self-owned businesses if there are special funds and lending rates for the small-scale businesses.