Monetary transmission mechanism in Nigeria: A causality test

Abstract

For decades the major focus of the Central Bank of Nigeria (CBN) has been the formulation and implementation of monetary policies on how to achieve the macroeconomic goals of low inflation, interest rate and exchange rate regulation, and sustained economic growth. But the real sector of the Nigerian economy has performed poorly in terms of sustainable economic growth, low inflation and stable interest and exchange rates. This has resulted in a erratically stable economy; monetary policy-shocks debarred sectors and highly vulnerable macroeconomic aggregates. This study examines the channels of monetary transmission mechanism in Nigeria. The main objective of the study is to identify and validate the existence of some channels of monetary transmission mechanism in the Nigerian context. The study reviewed both the theoretical, empirical and methodological literatures. The Granger causality test was adopted in the estimation of the relationship between the various channels and selected macroeconomic aggregates. Based on the results of our analysis, the study concludes that three channels are functional in Nigeria-the interest rate, exchange rate and the credit channels. We recommend that the exchange rate and interest rate channels should form a fundamental basis for inflation targeting in Nigeria.