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  • Alex Ekwueme Federal University Ndufu Alike Ikwo


The paper highlighted monetary policy transmission mechanism in Nigeria focusing on empirical studies and happenings in the country that retarded the efficiency of the Central Bank of Nigeria over the years in the pursuant of effective transmission mechanism. The empirical reviews from studies show that interest rate, credit channels and exchange rate are among the channels of monetary policy transmission to the economy. It also highlighted some of the problems that imposed a serious debility to effective transmission in Nigeria. The authors made some suggestions for improvement, among which include: the Central Bank must persevere legally, morally and otherwise to make the economy a cashless one. The low patronage of banking services by many Nigerians is a stumbling block in effective control of money supply which has contributed to incessant inflation in the country; any form of disguise or indirect interference by the government has to be put to an end; and the instruments of monetary policy such as interest rate and exchange that are known to be effective in some sectors should be properly managed and monitored.
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
The paper highlighted monetary policy transmission mechanism in Nigeria focusing on empirical
studies and happenings in the country that retarded the efficiency of the Central Bank of Nigeria
over the years in the pursuant of effective transmission mechanism. The empirical reviews from
studies show that interest rate, credit channels and exchange rate are among the channels of
monetary policy transmission to the economy. It also highlighted some of the problems that
imposed a serious debility to effective transmission in Nigeria. The authors made some suggestions
for improvement, among which include: the Central Bank must persevere legally, morally and
otherwise to make the economy a cashless one. The low patronage of banking services by many
Nigerians is a stumbling block in effective control of money supply which has contributed to
incessant inflation in the country; any form of disguise or indirect interference by the government
has to be put to an end; and the instruments of monetary policy such as interest rate and exchange
that are known to be effective in some sectors should be properly managed and monitored.
All over the world, monetary policy has played significant role in repositioning
economies. This is because of the application of various instruments that eventually
touch relevant macroeconomic variables such as output, resource utilization, assets
prices, credits, inflation amongst others. In Nigeria, monetary policy really encompasses
those rules and regulations designed by the apex monetary authority in collaboration with
the Federal Ministry of Finance aimed at sufficient regulation and control of money
supply, interest rate and credit availability with a view to attain the goals set up by the
government. Anyanwu (1993) posits that monetary policy is an indispensable economic
weapon of stabilization which involves different measures articulated to regulate and
control the quantum, cost, availability and direction of money and credit with the sole
purpose of achieving some predetermined macroeconomic goals. Really, the attainment
of this intention has to do with the existing transmission mechanism and the modus
operandi capable of touching effectively on appropriate macroeconomic variables,
thereby stabilizing the economy and impacting on economic growth and development.
Economists have paid much attention on the monetary transmission mechanism over
the years. One of the basic concerns is to have a good grasp of the ways monetary policy
affect the entire economy so as to take appropriate steps in ensuring positive results. For
instance, the nature of the Nigerian economy that is devoid of 100 percent banking
activity requires proper monitoring of the economy by the monetary authority. More so, it
is imperative to also know the impact of monetary policy on asset prices, firms’
productivity amongst others with the intention to adjust at the right time. In addition, to
ensure a well design policy instrument, it becomes relevant to assess the timing and
effect of policies on the economy. Just as Bovin et al (2010) posit that in order for the
policy maker to make proper assessment of an economy, the knowledge of the
mechanism by which the monetary policy impacts on the real economic activity and
inflation is indispensable.
Monetary policy transmission mechanism involves the process by which changes in
monetary decision of the monetary authority affects the rate of economic growth and
inflation rate. A sound grasp of the monetary transmission mechanism is essential for the
successful design of inflation targeting. This is because changes in interest rate affect
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
aggregate demand and inflation through effects on macroeconomic variables such as the
real cost of capital, bank credit, the exchange rate, household and corporate balance
sheets, wealth and monetary aggregates (Mukherjee and Bhattacharya, 2011; Taylor
Monetary transmission involves effective policy action. In his view, Cecchetti (1995)
points, a policy action is a change in the nominal supply of money in circulation. In order
to achieve that the apex bank controls the assets that is both in demand and for which
there is no perfect substitute, and prices must fail to adjust fully and immediately. Or else,
a change in the nominal quantity of outside money cannot have any impact on the real
interest rate, and will have no real effect.
In the frame work of Keynesian on the effect of monetary expansion on economic
aggregates, Ndubuisi (2006) notes that increase in money supply leads to excess supply
of money over the demand at the period. This in turn brings about increase in investment
in financial assets such as bonds, thereby leading to a fall in interest rate. But investment
is interest elastic, so the fall in interest rate encourages more investment which leads to
aggregate demand and consequently impacting positively on real income, output and
employment. The changes in the variables bring in more aggregate demand which
triggers price level to rise, and this situation will impact on supply of labour increase that
will promote output of labour. On the other hand, the rise in price leads to increase in
normal income which raises the transactions demand, and brings about a fall in demand
for bond owing to a decline in speculative demand for money. Hence, interest will rise
bringing down investment, aggregate demand, income, output and employment.
However, Ireland (2005) posits that the specific channels of monetary transmission
function via the impact the monetary policy has on interest rates, exchange rates, equity
and real estate prices, bank lending and firm balance sheets.
Theoretically, the traditional channels of monetary policy transmission mechanism are
focused on key macroeconomic variables such as investment, consumption and
international trade reactions. The Neoclassical works of Jorgenson (1963) ,Tobin, (1969)
dwelled on investment; Brumberg and Modigliani (1954), Ando and Modigliana (1963)
and Friedman (1957) focused on the life cycle and permanent income hypothesis of
consumption ; Fleming (1962) and Mundell (1963) models considered the effect on the
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
international IS/LM. Each articulated the influence on the macroeconomic scene resulting
from policy impacts.
Boivin et al (2010) note that the most traditional channel of monetary transmission
affecting macroeconomic variables involve the effect of interest rates on the cost of
capital and consequently on households investment expenditure such as residential and
consumer durables investment. Jorgenson (1963) has it that investment which is
influenced by cost of capital is the major determinant of the demand for capital for
investment in goods, residential housing or consumer durables. Consumers’
consumption expenditure is a function of lifetime resources that includes wealth from
stock, real estate and/or other assets. In this regard an expansionary monetary policy
such as reduced interest rates will on one hand arouse assets demand which triggers
prices increase in and also lowers the discount rate for income and service flows related
to stocks, homes, and other assets pushing their prices. Consequently, aggregate wealth
will stimulate consumption by economic agents and aggregate demand (Brumberg and
Modigliana (1954); Ando and Modigliana (1963).
Worthy to note is when the apex bank lowers the interest rates, the return on local
assets decline vis a-vis foreign assets. The effect is that the cost of local assets in
comparison with other value of assets falls, and lowers the currency of the local
economy. This makes output of the local economy relatively cheaper than foreign goods
and so resulting to a rise in export. This is an injection into the economy which increases
aggregate demand, thereby impacting on income, output and employment. So, the
exchange rate which is a tool of monetary policy plays a remarkable role on the way
monetary policy impact on the economy.
However, in Nigeria the persistent rise in prices of goods and services gives room to
question the efficiency and effectiveness of the monetary policy transmission mechanism.
Available data show that between 1970-74 inflation stood at 10.28, 1975-79, 19.74, 1990-
94, 23.84, 1995 99, 25.44. CBN reports also pointed that by 2001, inflation rate was
18.9 percent, fall slightly to 12.90 percent in 2002, rose to 14.00 and 15.4 percent in 2003
and 2004 respectively. By 2005, it was 17.9 and it fell to 8.5 and 6.6 percent in 2006 and
2007 respectively. By 2009 inflation rate stood at 12.0 percent. In March 2012, core
inflation was 15.0 percent. This persistent rise in prices has really affected the living
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
standard of the people as the real income of the people is made to fall (CBN, 2003;
Ukoha 2007; Uma et al, 2012).
In this paper, it is our intention to give an over view of the monetary policy
transmission mechanism in Nigeria with a view to suggest way forward. The paper is
presented thus: section two is some transmission channels; monetary transmission
mechanism in Nigeria is the section three; problems of monetary policy transmission
mechanism is the fourth section while section four is the way forward and conclusion.
Basically, the channel of monetary policy is concerned with the changes associated
with the alteration of money supply and the effects on prices of goods and services,
output of sectors and employment. Positive changes in aggregate demand in the country
do reposition production level, employment and wages which in turn reflect on prices. The
monitoring of the extent of policy transmission is imperative so as to take adequate
measures in avoiding adverse effects which is inimical to the growth and development of
the economy. Given the Keynesian channel of monetary transmission and that of
neoclassical, in this context, it is necessary to examine the channels of transmission
mechanism of key instruments such as interest rate, credit, exchange rate, asset prices
and inflation expectation.
Interest Rate Channel
The Monetary Policy Rate (MPR) is the official interest rate in use in Nigeria by the
apex bank in 2006. Prior to this period, the Minimum Rediscount Rate (MRR) was in use.
The country witnessed instability on the official interest rate due to changes over the
years. However, in the year 2000 there was a relative volatility of the official interest rate,
but in 2004 and 2005 there was a relative stability in the interest rate. Given this situation,
the commercial banks experienced instability in their lending rate between 1999 Q1 to
2007 Q4 and it was more volatile than the apex bank’s interest rate. The volatility was
highly conspicuous in 1999, 2001, 2003, 2004 and 2005. However, prime lending rate
has witnessed instability since after consolidation of 2005, post-consolidation period of
2007 and this period (Ndekwe, 2013).
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Firms and investors react in a way given the instability in lending rate. High interest
rate raises the cost of investment given that interest rate is inversely related to
investment. Bature (2014) notes that economic agents who are confronted with higher
real cost of borrowing resulting from contractionary monetary policy usually cut down
borrowing and then consumption which in turn reduces aggregate demand, output and
employment. On the other hand, an expansionary monetary policy has the effect of
encouraging investment, income generation, output and employment of resources. So,
Nigeria has witnessed low investment over the years resulting from volatility of both apex
and commercial banks interest rates.
The interest rate channel is supported by empirical studies. For instance, recent
studies by Nwosa and Saibu (2012) asserted that interest rate channel of transmission is
very strong in impacting on the productive sector of the Nigerian economy. Ishioro (2013)
added that negative monetary shocks pose a constraint to the banking system’s
capability to dispose deposits, and consequently, demand for bonds rise while demand
for money declines. So, non-fully adjustability of price leads to a fall in real money
balances causing interest rates to rise and increasing the cost of capital. Fall in
investment lowers both aggregate demand and output
Credit Channels
The credit channels are associated with the bank lending and the bank balance
sheets transmission mechanism. Credit channel is made up of factors that assist and
support the effect of interest rate. It is linked with the commercial banks and an
augmentation mechanism. However, lending rate is taken to be less important in this
respect if the demand for bank deposits is highly elastic. A rise in Treasury bill rate has a
way of moving deposits out of banking system, thereby affecting aggregate demand
through accessibility of credit instead of through cost. This bank lending rate transmission
shows the great role banks play in the financial system in that they offer bank deposits
which add to the aggregate broad money supply and they hold various assets and give
loans to different classes of borrowers. So, the contractionary monetary policy usually
reduces bank reserves and bank deposits give impacts through its effect on the
borrowers. The availability of banks loans can be regulated by raising reserves
requirements with the aim of lowering total quantity of commercial bank assets. Besides,
the Central Bank of Nigeria can engage in open market sales of treasury bills and
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
government development stock. This action has the power of reducing commercial banks’
reserves considering the fact that depositors will prefer and switch over to lucrative
financial assets and lessen commercial banks deposits (Mishkin, 1995; Ishioro, 2013;
Bature, 2014).
Studies by Li (2000) and Repullo and Suarez (2000) have shown that expansionary
monetary policy raises bank lending and aggregate investment; reduce the spread
between rates charged to borrowers and risk-free rate and result to a movement or shift
in the offering of credit to more risky firms. In other words, monetary expansion can bring
a liquidity effect that increases credit to households and raises aggregate economic
Suffice it to note that the balance channel of monetary policy hinges on
contractionary or expansionary policy impacts that is not only on market interest rates but
also on financial positions of borrower directly or indirectly. Contractionary policy
adversely affects borrowers in that raising interest rate will increase interest expenses,
lowering net cash flows and damnify the borrowers’ financial power. In the same vein,
raising interest rate will bring a fall in asset prices thereby lessening borrowers’ collateral.
This situation also reduces the purchasing power of consumers and consequently
reduces firms’ total revenue due to low demand. Consequently, firms’ fixed or quasi-fixed
cost are affected as they cannot adjust in the short run, and so this gap reduces the firms’
net worth and credit worthiness. So, the balance sheet channel functions via the net work
of business firms (Bernanke and Blinder 1988, 1992).
Exchange Rate Channel
In actual fact, any change in the exchange rate impacts on spending pattern of the
people, firms and ultimately on goods and services. In a flexible exchange rate regime
which is determined by the market forces and an expansionary monetary policy will lower
the domestic currencies and raise the prices of imported goods and services. The output,
employment and resources utilization can be influenced by exchange rate transmission
depending on the degree of openness of the economy and the exchange rate
arrangement. Studies have shown that exchange rate channel operates through
aggregate demand and aggregate supply which is more effective under flexible exchange
rate regime and the channel involves interest rate effects. A rise in domestic real interest
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
rate, then domestic deposits is more lucrative in comparison to deposits denominated in
foreign currencies and deposits which give rise to a rise in exchange rate and
consequently a fall in the net export and output. A fall in the domestic currency’s
purchasing power will bring about proportional currency depreciation in the foreign
exchange market under purchasing power parity (Taylor, 1995; Mishkin, 1995; Obstfeld
and Rogoff, 1995; Krugman and Obstfeld, 2000).
Asset Price Channel
In this channel of transmission, contractionary interest rate (raising interest rate)
makes bonds relatively less profitable to equities forcing equities prices to fall. It can be
inferred that reducing equity prices leads to a decline in q (the ratio of market value of
firms to the replacement cost). Tobin q theory (1969) refers it (q) as the market value of
firms divided by the replacement cost of capital. The equity price channel is sub-divided
into two which are investment effect due to Tobin’s quantity theory of money and wealth
effect on consumption and Modigliana’s life cycle income hypothesis. So, lowering
investment expenditure brings about reaction on asset price channel of monetary
transmission mechanism, specifically on wealth effect of consumption. Modigliana (1971)
in his life-cycle hypothesis of consumption, points that wealth is the major determinant
factor of consumption expenditure in any economy. But financial wealth is an important
aspect of stock and so transmission channel is linked to interest rate relationship with
asset prices, specifically common stock. A fall in stock prices leads to a decline in
financial wealth and consequently lowers the lifetime resources of household, thereby
reducing consumption. In other words, when asset price is falling it affects aggregate
demand in two ways. One is that long term interest rate and value of housing and
financial assets such as stocks and bonds will fall, which in turn reduce financial wealth
and adversely affect household consumption. Two is that lower prices of financial assets
reduce the market value of firms compared to the replacement cost of capital which
retard investment demand. So, the channel of monetary policy transmission is that
regulation of interest rate inform of contractionary approach brings a fall in stock prices
thereby impacting on the other sub-channel of transmission mechanism in the other
assets prices channel (Mishkin 2001; Mukherjee and Bhattacharya, 2011).
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
Expectation Channels
This channel is not independent and it plays significant role in an effective
transmission mechanism. There is expectation of changes in private wages and prices
since these can accelerate alteration of nominal demand with respect to central bank
policy and impact on the delay to inflation decline. Expectation channel centres on private
sector’s anticipation about future related variables. The expectation channel sees all
variables as having inter-temporal or short term mutual effects and so they are
determined in a forward-looking approach since they are influenced by the economic
agent’s conviction about future shocks to the economy and how the apex bank responds
to them. The expectation channels are short period reciprocity perception of the static
interest rate, asset prices, exchange rate and monetary credit mechanisms. A typical
example is that suppose there is public awareness on the future policy of apex bank, not
yet backed with existing policy. This pronouncement does impact on real activity by
changing market expectations which will trigger changes in current money and assets
markets and ultimately result to changes in output and inflation. Nevertheless, this
operation is a function of few factors such as the extent of apex bank credibility. So, a
higher level of credibility will result in more anticipation effects of monetary policy and vice
versa. Besides, is the extent of predictability of apex bank actions which its improvement
bothers on raising transparency and a sound policy dissemination to the public. Lastly,
its a known high level of commitment to changing its tools of influencing the economy
constantly has a way of encouraging the influence of expectation channel (Persson and
Tabellini, 1997; Loayza and Schmidt-Hebbel, 2002; Mohanty and Turner, 2006).
All the aforementioned demonstrates the transmission channels depending on the
development of the country and the institutional frame work. Countries have unique
transmission mechanism and not a uniform channel. A very open economy with
developed money and financial market has more channel of transmission than an
underdeveloped economy with weak institutional arrangement. Whatever channel of
monetary policy transmission mechanism dominant in a country, the apex bank has the
responsibility of adequate policy implementation and monitoring to ensure stability,
improved aggregate economic activity and sustainable growth.
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
The major key player in influencing the Nigerian economy is the Central Bank of
Nigeria (CBN). CBN (1996) points out that the Nigerian financial system comprises the
regulatory/supervisory authorities. The CBN is at the apex, principal regulator and
supervisor in the money market, with the Nigerian Deposit Insurance Corporation (NDIC)
playing complementary role. Actually, the promulgation of the CBN Decree 24 and Banks
and Other Financial Institutions (BOFI) Decree 25, both of 1991, gave the Bank more
flexibility in regulating and supervising the banking sector and licensing finance
companies which was not so before. The CBN , apart from designing and implementing
policies with a view to help in the development and growth of the country always pursue
her universal goals of maintaining monetary stability through strengthening the real
sector. Although the real sector in Nigeria has peculiar features due to the nature of the
economy and low banking consciousness. Ndekwu (2013) notes that the Nigerian
economy is far separated from the monetary and financial sectors and sometimes
manifest an elusive feature in monetary management. This is on the basis that the growth
in financial sector resulting from liberalization left the real sector behind.
CBN (2013) notes that the monetary policy strategy, is anchored on the attainment of
internal balance and external viability. This is the intention of the Monetary Policy
Committee that employs appropriate instruments of monetary policy to effect changes in
the liquidity of the deposit money in the banks to influence the supply of money and
regulates the financial institutions interest rates so as to affect all spending in the
economy. Mordi (2009) notes that monetary policy is a blend of measures and/or set of
instruments designed by the Central Bank to regulate the value, supply and cost of
money consistent with the absorptive capacity of the economy or the expected level of
economic activity without necessarily generating undue pressure on domestic prices and
the exchange rate. Low and stable inflation has been pursued by the Central Bank. This
is because of the unfavourable costs it has in the economy. So, the intention of monetary
authority is aimed at counteracting undesirable distortions in macroeconomic variables.
Studies have shown various channels of monetary policy influence in Nigeria, also the
effective channels of transmission and weak channels. In their study, Nwosa and Saibu
(2012) employed granger causality and Vector Auto-regressive method of analysis of
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
transmission of monetary policy on sectorial output using a time series data from 1986-
2009. They concluded that there are two channels of transmission mechanism in the
study. The interest rate was found to be responsible for transmitting monetary effect on
agriculture and manufacturing sectors while the exchange rate has greater effect in
transmitting monetary impulse to the building, construction, mining, wholesale and
service sectors. He therefore concluded that differences in monetary policy transmission
channels to sectors portray the constraints debilitating uniform and economic wide
monetary policy in Nigeria. This led to policy implication of the adoption of a specific
policy based on the strength and relevance of the sector with respect to the entire
monetary policy mechanism. Emphasis of monetary policy transmission should focus on
interest rate as essential to stimulate output growth while the exchange rate channel is
required in encouraging production in output of agriculture, manufacturing, building,
construction, mining, wholesale and service sectors.
In a similar vein, Ditimi et al (2011) appraised monetary policy effect on
macroeconomic variables and the development of Nigerian economy using ordinary least
square method. They found that monetary policy has a significant impact on exchange
rate and money supply and also that monetary policy transmission has a significant
impact on price stability. The study therefore discouraged excessive expenditure by the
government and the need for the alignment of the fiscal policy with the monetary policy
measures so as to enhance the attainment of macroeconomic objectives.
In his analysis of the effect of monetary policy innovations in Nigeria, Chuku (2009)
used structural vector auto-regression model and examined the effect of shocks of
monetary policy on output and prices. The study focused on three policy instruments-
broad money, minimum rediscount rate and the real effective exchange rate. He found
that monetary policy innovation performed on broad money has modest effects on output
and prices with high speed of adjustment; whereas the innovations on minimum
rediscount rate and real exchange rate have neutral and momentary effects on output.
This led to the conclusion that adjusting and effecting changes in the broad quantity of
money is the most effective instrument for the monetary policy exercise. However,
Fasanya et al (2013) study shows that inflation rate, exchange rate and external reserve
are the important monetary instruments that promote growth of the Nigerian economy.
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
In addition, a study of transmission mechanism of monetary policy in Nigeria by
Ndekwe (2013) found that the credit channel in the financial market for the supply of
credit to private sector gives the most great effect in the way monetary policy transmit to
the economy. He also realised that interest rate and exchange rate channels at the period
1981-2008 have weak effect on the real economy.
A developing country such as Nigeria has myriad of problems that in various ways
debilitate smooth transmission of monetary policy. Regulation of money supply has never
been easy given the nature of the economy and the role of the government officials. The
economy has witnessed varieties of instability due to management of interest rate and
other policy instruments. This has impacted adversely on inflation control which called for
questioning on the effectiveness of monetary policy in reducing inflation. The low banking
activity of many Nigerians has a debilitating effect on the activity of the apex bank in
achieving a desirable effect. Effective regulation of money supply is really difficult when
over 40% of the population have no bank account in any bank in Nigeria. Distress of
banks in the past and ugly experience of depositors contributed to this non-chalant
attitude of many Nigerians, thereby resulting in lack of confidence.
Ishioro (2013) posits that the essence of the Central Bank of Nigeria formulating and
implementation of monetary policy is aimed at on how to achieve the macroeconomic
goals of low inflation, interest rate and exchange rate regulation and sustainable growth
and development. He sadly noted that the real sector of the Nigerian economy has poorly
performed in terms of low inflation, unstable interest and exchange rates and
consequently low sustainable economic growth.
This situation hinges on the peculiar nature of the Nigerian economy that is dominated
by rural areas which are devoid of efficient banking sector and the interference of the
government on the apex banking operation. It is also pertinent to mention that the high
rate of crimes and insecurity of lives and property has its bit of constraints in the
implementation of monetary policy in Nigeria. More so, prior to Structural Adjustment
Programme (SAP), monetary policy instrument such as interest rate, liquidity ratios of
banks and credit allocation were mainly used to support the fiscal operations of the
existing government. The independence of the Central Bank of Nigeria was still
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
unattainable. Consequently, the major monetary regulatory role of the Central Bank was
thwarted by the Nigerian government decisions on fiscal activity. The whims and caprices
of the government were pursued at the detriment of effective monetary policy
Ndekwu (1983, 1990) points that monetary policy was just designed to satisfy the
fiscal operations of government and to allocate inflationary pressures and exchange rate
regulation in operation was specifically for the control of capital movement with respect to
foreign exchange resources. Instead of exchange rate to be managed to transmit in the
economy, government directed what transpired. This action weakens effective monetary
transmission mechanism in Nigeria. The period of Structural Adjustment Programme
(SAP) brought deregulation in the economy that brought about more banking businesses
and growth of financial institutions but in early 1980s and 1990s, many banks
experienced distress and bankruptcy which send many banks and financial institutions
out of the economic activity, thereby impacting adversely on the ability of the apex bank
to effectively manage the entire financial system. The experience of bank customers at
the period contributed to the non-chalant attitudes of many customers to operating bank
accounts which has retarded efficient control of money supply.
The inefficient operation of the banking sector devoid of information communication
technology had its adverse effect which later developed giving room for efficiency and
effective banking operation domestically and internationally. Post consolidation of bank
brought with it a lot of changes such as stabilization of money market rate; proper liquidity
management approach and replacement of minimum rediscount rate with monetary
policy rate. Improper supervision which gave rise to some features in the banking sector
affected financial operation in the financial system. A situation where borrower could not
pay back imposed challenges to the apex bank in 2009 which led to actions such as bail
out to remedy the situation and also embark on activities to avert such happening such
as proper supervision and guide lines.
However, it can be stated that the Central Bank of Nigeria has delved into different
approaches to ensure fulfilling the objectives establishing it in spite of weak institutional
frame work and inability of the financial markets to play required roles. The performance
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
of monetary operation and its transmission to the economy has experienced difficulties
since the military regime until this present period. From the overall changes over the
years, it can be said that the apex bank have taken full responsibility of sustainable
growth of the economy more preferable to what transpired over twenty years ago.
Reforms and consolidation of 2005 greatly ushered in remarkable changes.
Way Forward for Effective Monetary Policy Channel of transmission
In consideration of the channel of monetary policy transmission in Nigeria over the
years which can be inferred as ineffective in sustaining growth and stability given the
circumstances that impeded the achievement of this lofty goal and frequent inflation, it is
our view that efforts are required in the following direction for a better effect.
i) The Central Bank must persevere legally, morally and otherwise to make the economy
a cashless one. The low patronage of banking services by many Nigerians is a stumbling
block in effective control of money supply and has contributed to incessant inflation in the
country. In other words, the confidence of banking services consumers must be restored
to discourage keeping of huge amount of cash at home.
iii) Any form of disguise or indirect interference by the government has to be put to an
end. The autonomy of the Central Bank of Nigeria has to be strictly adhered to by all
arms of government. The effect of interference in the past played a significant ugly role in
the pursuant of effective central banking in Nigeria in recent time.
(iv)Instruments of monetary policy such as interest rate and exchange that are known to
be effective in some sectors should be properly managed and monitored to enhance the
economic activity of the sector (s). This implies effective surveillance of instruments roles
with a view to change or adjust as the situation demands.
(v) It is imperative that concerted effort is made to put to an end insecurity of life and
properties in the country. Bank robbery has imposed severe constraints in effective
banking operation in Nigeria.
(vi) Strict compliance of guide line by financial institutions must be pursued in all
ramifications to ensure positive results from all quarters.
01 September 2014, Prague 12th International Academic Conference ISBN , IISES
The paper has highlighted the channels of monetary policy transmission mechanism to
an extent, and specifically in Nigeria considering situations in the past and empirical
findings by few researchers. It is obvious that all the articulated channels of transmission
are yet to be effective considering empirical results and nature of the economy and much
interference by the government in the recent past. It is envisaged that to encourage
sufficient impact of monetary policy on inflation rate and the economy debilitating factors
have to be addressed. Besides, credit channel in the financial market and interest rate
must be manipulated from time to time to accelerate aggregate economic activity since
they are known to play important role in the monetary policy transmission mechanism in
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This study examined the relative effectiveness of selected monetary policy instruments on the performance of two key real sectors in the Nigerian economy. The paper focused on the period 1981-2016 due to its significance in the history of monetary policy in Nigeria (financial sector liberalization started in the year 1986). Time series data sourced from the Central Bank of Nigeria (CBN) statistical bulletin and the World Development Indicator Database published by the World Bank were used in this study. Agricultural and manufacturing sector output were used as the proxies for real sector performance; while money supply, interest rate, broad money growth rate, and credit to the sectors were the predicting variables. The pre-estimation tests (i.e. unit root and cointegration) shows the time series are a mix of order of integration and a long run relationship was also revealed by the ARDL Bounds cointegration tests conducted on the estimated models. The estimated models revealed that money supply had positive and significant effect on performance of the real sectors in the short run and also expected to have a positive effect on the both sectors in the long run. Interest rate proved to be an insignificant predictor of the performance of the agricultural and manufacturing sector. Broad money growth rate impacted positively and significantly on the output from both sectors in the short run; but negatively in the long run. Credit to the both sectors had positive impact on both sectors in the short run but a negative and significant impact in the long run. The study recommends that money supply should increase to these sectors as flow of bank credits to the sector should also continue to increase. Moreover, a single digit interest rate on loan from the commercial banks to help encourage investment in the agriculture and manufacturing sector in Nigeria.
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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. DOI: 10.5901/mjss.2013.v4n13p377
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Monetary policy comprises the rules and actions adopted by the central bank to achieve its objectives. In most countries the primary goal of monetary policy is price stability. However, the mandate of many central banks also encompasses other objectives, including attainment of full employment, domestic financial stability , and normal operation of foreign payments. The priority of price stability over other policy goals tends to be politically accepted in most countries, if not actually enshrined in the laws governing the central bank. Changes in monetary policy are triggered by domestic and external shocks that can imperil the attainment of policy objectives. Central banks implement policy changes by resetting their policy instrument, usually a short-term interest rate or a monetary or bank credit aggregate. These instruments affect the economy through various mechanisms of transmission to the ultimate policy goals. Hence a useful way to understand monetary policy is to focus separately on central bank policy actions and the transmission mechanisms through which those actions work their effect. The central bank’s policy rule or reaction function embodies its response to deviations in macroeconomic variables in order to achieve its ultimate policy objectives. Beyond the simple description of these policy rules, it is important to assess their efficiency (in the sense of achieving the desired combination of goals, subject to the structure of the We are grateful to Francisco Gallego for his valuable contribution to the preparation of this overview.
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The study investigated the transmission channels of monetary policy impulses on sectoral output growth in Nigeria for the period 1986 to 2009. Secondary quarterly data were used for the study while granger causality and Vector Auto-regressive Method of analysis were utilized. The results showed that interest rate channel was most effective in transmitting monetary policy to Agriculture and Manufacturing sectors while exchange rate channel was most effective for transmitting monetary policy to Building/Construction, Mining, Service and Wholesale/Retail sectors. The study concluded that interest rate and exchange rate policies were the most effective monetary policy measures in stimulating sectoral output growth in Nigeria.
The world is still a closed economy, but its regions and countries are becoming increasingly open. The trend, manifested in both freer movement of goods and increased mobility of capital, has been stimulated by the dismantling of trade and exchange controls in Europe, the gradual erosion of the real burden of tariff protection, and the stability, unparalleled since 1914, of the exchange rates. The international economic climate has changed in the direction of financial integration 2 and this has important