Eddy C. Ndekwu

Document Type

Occasional Paper

Publication Title

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


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 two and-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.

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