The dominant channels of monetary policy transmission in Nigeria: an empirical investigation.

Abstract

The paper aims at identifying the dominant channel of monetary policy transmission in Nigeria. The standard vector autoregressive methodology is adopted. The data set for the study spans 1998:Q1 and 2006:Q4. ADF tests confirm stationarity. The impulse response function shows that an unexpected shock of the monetary policy rate does not have a contemporaneous effect on gross domestic product and Consumer price index. In the quarter after the policy shock, output and price shrink marginally. Variance decomposition shows that the change in the policy rate contributes 22 per cent to total variation in GDP in the third quarter. However, the highest dip in prices as a result of the policy shock is observed in the fourth quarter. Variance decomposition shows that the change in the CPI was mainly caused by GDP and lags of CPI itself. The inferences from the study show that the lending rate provides the strongest nexus for the propagation of monetary policy impulses in Nigeria.