Monetary Policy and the Transmission Mechanism: Evidence from Nigeria

Onyemachi Maxwell Ogbulu, Lezaasi Lenee Torbira


This paper is an attempt aimed at investigating the empirical relationship between measures of monetary policy and the bank asset (BKA) channel of the monetary transmission mechanism as well as the direction of causality between them. The impulse response function of the monetary variables to shocks in the monetary system were also examined. Using data for the period 1970-2010 and employing co-integration, error correction mechanism and variance decomposition techniques, the study found a positive and significant long run relationship between BKA, money supply (MNS), cash reserve ratio (CRR) and Minimum Rediscount Rate (MRR) as well as a uni-directional Granger causality from BKA and CRR to MNS respectively. The results of the variance decomposition of BKA to shocks emanating from CRR, MRR and MNS show that own shocks remain the dominant source of total variations in the forecast error of the variables. The authors recommend that monetary policies should be properly fashioned to accomplish their target objectives in the economy.

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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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