Empirical Analysis of Monetary Policy Channels and the Nigerian Economy

Purpose: The study empirically analyses monetary policy channels and the Nigerian economy, with a view to examine the effect of monetary policy channels on the economy as well as how it determines the causal relationship between various channels of monetary policy and macroeconomic aggregates of the economy. Design/Methodology/Approach: The VAR impulse-response and variance decomposition and Granger causality tests were considered as analytical techniques of the study with time series data spanning in the period of 1985-2018. Findings: The findings through the impulse-response and variance decomposition results reveal that interest rate channel is the most effective and dominant monetary policy channel in Nigeria, while the causality tests also confirm the existence of causal relationship between the monetary policy channels and the Nigerian economy with the traditional interest rate channel Granger causes the Gross Domestic Product and the consumer price index respectively but not causally related to the country’s reserves. Practical implication: Based on the findings, the study recommends that to improve the effectiveness of monetary policy the monetary authorities in Nigeria should take cognizance of channels of monetary policy that impacted positively on the economy particularly those found to be causality related to macroeconomic indicators of the economy. Originality/Value: The study provides the missing link by examining the various channels of monetary policy that affect the Nigerian Economy using selected macroeconomic aggregates and also determines not mere relationship but causal relationship between monetary policy channels and macroeconomic aggregates with expanded scope from 1985 to 2018. This makes the study unique from others considered in the literature.