Monetary Policy Transmission Mechanism in Nigeria: A FAVAR Approach


  •  Frances Obafemi    
  •  Eugene Ifere    

Abstract

Empirical evidence on the effectiveness, dominant and the exact channel through which monetary policy impact the Nigerian economy is at best mixed. Against this backdrop, this paper set out to investigate this mixed evidence by exploring a data-rich environment using a FAVAR model estimated with 53 variables spanning the quarterly period of 1970:01 to 2013:04. Overall, the results showed that interest rates and credit channels are the dominant and strongest channel of transmission of monetary shocks in Nigeria, followed by Exchange rate and money channel. Stock channel, has no significant impact in the transmission process. Based on these result, we recommended that the Central Bank of Nigeria should improve on the use of the interest rate and credit channels as monetary policy variables through a policy approach of stimulating and emphasizing judicious management. This has the capacity to stimulate growth in distinct sectors of the economy.



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