An Analysis of The Monetary Policy Transmission Mechanism and The Real Economy in Nigeria

Abstract

I wish to acknowledge with thanks the opportunity, resources and facilities made available for the Research. I appreciate the wonderful cooperation of the management and staff of the Central Bank of Nigeria, Abuja, as well as their intellectual contributions through formal and informal discussions and at the CBN Seminar on the draft of the paper. In particular, I must express my deep appreciation to the Deputy Governor (Economic Policy) Dr. (Mrs.) S. O. Alade, and Director, Research Department, Mr. Charles N. O. Mordi for their invaluable supportive role during the Programme. Finally, I thank my associate computing assistant (Mr. Titus Ogunmola at NISER, Ibadan) for all the computations. The study is an empirical analysis which seeks to explain the monetary policy transmission mechanism to the real economy in Nigeria. It examines the process by which the interest rate policy of the Central Bank of Nigeria actually affects the structure of interest rates, credit, aggregate demand and output production and, hence, changes in inflation rate. In the analysis, we review the paradigm of the channels of monetary policy transmission mechanism by studying over twoand-half dozen cases of empirical studies in the economic literature. By applying vector auto-regression (VAR) with dynamic logarithmic form and the ordinary least squares (OLS) methods, the empirical functional relationships of the macroeconomic variables in the process were captured. It is found that, of all the channels, the credit channel in the financial market for credit supply and accessibility to the private sector provide the effect of a linchpin in the process by which monetary policy transmits to the real economy. However, interest rate and exchange rate channels during the period (1981 – 2008) appeared to have had a weak effect on the real economy. It is, accordingly, suggested that credit supply and accessibility to the real productive sector of the economy in Nigeria should be radically reformed and strengthened with appropriate regulatory measures, while still maintaining the Monetary Policy Rate as the monetary policy anchor to effect changes in the interest rate structure, credit and exchange rate in the real economy. AN ANALYSIS OF THE MONETARY POLICY TRANSMISSION MECHANISM AND THE REAL ECONOMY IN NIGERIA *This research was undertaken during the period ________ to ________ while Professor Eddy C. Ndekwu was a Visiting Research Scholar in the Research Department under the Central Bank of Nigeria Diaspora Collaborative Research Programme (DCRP)/Visiting Research Scholars Programme (VRSP) An Analysis of The Monetary Policy Transmission Mechanism and The Real Economy in Nigeria An Analysis of The Monetary Policy Transmission Mechanism and The Real Economy in Nigeria

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