Recession, depression or deflationary gap can be negated by an expansionary monetary policy. Deflationary gap emerges when there is a fall in consumer demand for goods and services; investment demand in goods and services. The Central Banks commences an expansionary policy to ease the credit conditions in the market resulting in an upward shift in aggregate demand.
For this purpose, the central bank purchases government securities in the open market, lowers the reserve requirements of member banks. Lowers the discount rate and encourages consumer and business credit through selective credit. An expansionary money policy is an increase in money supply which will cause a decrease in average interest rates in an economy which represents a short run effect of the money supply increments. This short run occurs before the price level is impacted. Expansionary monetary policy could have a negative effect or positive effect depending on the variables.
For example above an increase in the money supply caused a decrease in average interest rates in an economy. Expansionary monetary policy causes an increase in bond prices and a reduction in interest rates. It lowers interest rates which lead to higher levels of capital investment and can also lead to decline in investment. Expansionary monetary policy may also have inflationary tendencies; marred with high rates of unemployment. Furthermore, Okezie in 2015 opined that the growth of investment in Nigeria is directly dependent on; and determined by money supply as indicated in the short and long run period with implications that any reduction in money supply (contraption) would have a negative repercussion on investment growth in Nigeria.
Nevertheless, to avoid the negative effects of expansionary monetary policy, Monetary Policy Rate could be maintained by the CBN. In 2016, the CBN applied Open Market Operation to manage liquidity to achieve the desired goals in the short run.
