The Lending Channel of Monetary Policy Transmission in Nigeria; Vector Auto-regressive (VAR) Verification

Abstract

This paper has evaluated the nature of the lending channel of monetary policy transmission mechanism. The major prediction of the approach is that a monetary tightening through increase in the policy interest rate will lead to a decline in the quantity of loans granted by commercial banks. Nigerian data from 1970 to 2003 have been utilized to ascertain the correctness of this hypothesis, using the vector autoregressive methodology. The results show that increases in the Treasury bill ratelead to a contemporaneous rise in the price of loans and a fall (with a lag)in the quantity of loans. Both affirm the existence of the lending channel medium for monetary policy transmission in Nigeria.