Interest Rate Dynamics and Real Output Behaviour in Nigeria: A Simulation Analysis

Authors

S. Rapu, Central Bank of NigeriaFollow
G. Sanni, Central Bank of Nigeria
D. Penzin, Central Bank of NigeriaFollow
N. Nkang, Central Bank of NigeriaFollow
P. Golit, Central Bank of NigeriaFollow
H. Okafor, Central Bank of NigeriaFollow
E. Ibi, Central Bank of NigeriaFollow

Publisher

Central Bank of Nigeria

Keywords

Monetary Policy, Output, VAR, Inflation, Growth, Simulation

Abstract

The declining output growth observed from the second quarter of 2014, which led to calls for a more expansionary monetary policy despite rising inflationary pressure, necessitated a reassessment of the impact of interest rate on real output growth in Nigeria. Using a Bayesian Vector Autoregressive (BVAR) model and quarterly data from 2000:Q4 to 2015:Q3, the effect of monetary policy transmission (interest rate dynamics) on real output performance was estimated. Although results of the simulation analysis were somewhat mixed, those of the impulse response functions indicated that positive shocks to monetary policy rate (MPR) produced a negative and small impact on output. Specifically, reducing the MPR from 13 to 10 per cent, would lead to an increase in output growth from 2.35 per cent in 2015Q3 to 3.84 per cent in 2016Q3. However, when the MPR was raised from 13 to 14 per cent, output grew albeit at a slower rate from 2.35 to 3.16 per cent during the same period. The authors concluded that policy rate adjustment could be used as a major tool to boost output growth, especially if inflation is low and stable.

Author Bio

The authors are staff of the Research Department, Central Bank of Nigeria

Publication Title

CBN Economic and Financial Review

Issue

1

Volume

55

Recommended Citation

Rapu, S.; Sanni, G.; Penzin, D.; Nkang, N.; Golit, P.; Okafor, H. and Ibi, E. (2017). Interest Rate Dynamics and Real Output Behaviour in Nigeria: A Simulation Analysis. Economic and Financial review. 55(1), 75-110.