Transmission Mechanism of Monetary Policy in Nigeria: Evidence from VAR Approach

Although the vast majority of the economists and the policy makers alike would agree that monetary policy is relatively effective at least in the short run, there is enormous room for dispute on how it is transmitted through various channels to the economy (Bernanke & Gertler, 1995). Thus, using Vector Autoregressive (VAR) model, this study examines the transmission mechanism of monetary policy in Nigeria. Applying monthly time series data covering the period of 2000M1 to 2014M12, the study shows that there is no long run relationship among monetary policy variables and real economic variables and that monetary policy is relatively effective in Nigeria. In addition, the study reveals three stylized facts about the transmission mechanism of monetary policy: (i) the two primary traditional channels of monetary policy (interest rate & asset price channels) are very weak in Nigeria; (ii) the bank lending channel is not operative in the country; and (iii) the credit and exchange rate channel are the most effective channels through which monetary policy is transmitted in the case of Nigeria. In light of the findings, it is recommended that CBN should re-modify its monetary policy to ensure steady and non-inflationary economic growth in Nigeria.