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Financial development, interest rate pass-through and interest rate channel of monetary policy

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  • Olajide Oyadeyi

Abstract

The paper examined the interest rate operations and processes in Nigeria and examined the role of financial development in incentivizing central bank monetary policies from the monetary policy rate to the money market rates, lending rates, and deposit rates. The analysis covered the period from 1981 to 2021 with sub-samples for 1981 to 2011 and 1991 to 2021 to test the consistency of the findings. The findings confirmed that interest rate pass-through is incomplete for Nigeria, albeit to a lower degree in the short run compared to the long run. The reasons for this may be due to interest rate stickiness, problems of asymmetric information, and bank switching costs. Also, the findings confirmed that financial development weakens the impact of monetary policy on the interest rate pass-through process, while the analysis of the asymmetric mean adjustment lags confirmed that changes in the policy rate are transmitted to the deposit and lending rates within the year it was announced. The analysis confirmed that the results across each sub-sample and the robustness tests are consistent with the main analysis. Therefore, it is imperative that policymakers should account for financial development when designing monetary policy effectiveness since it can hinder or strengthen the interest rate monetary policy channel.

Suggested Citation

  • Olajide Oyadeyi, 2023. "Financial development, interest rate pass-through and interest rate channel of monetary policy," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(1), pages 2209952-220, December.
    • Handle: RePEc:taf:oaefxx:v:11:y:2023:i:1:p:2209952
    DOI: 10.1080/23322039.2023.2209952
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    File URL: http://hdl.handle.net/10.1080/23322039.2023.2209952
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    Cited by:

    1. Olajide O. Oyadeyi & Idris A. Adediran & Balikis A. Kabir, 2024. "Remittance and Macroeconomic Performance in Top Migrating Countries," Social Sciences, MDPI, vol. 13(5), pages 1-23, April.
    2. Frederick Nsambu Kijjambu & Benjamin Musiita, 2024. "Understanding the Dynamics Between Monetary Policy and Interest Rate Spreads in Uganda: A Quantitative Study," Journal of Economics and Behavioral Studies, AMH International, vol. 16(2), pages 15-26.
    3. Olajide Oyadeyi, 2023. "Financial development, real sector, and economic growth in Nigeria," SN Business & Economics, Springer, vol. 3(8), pages 1-21, August.
    4. Oyadeyi, Olajide & Akinbobola, Temidayo, 2022. "Financial Development and the Current Account in Nigeria," MPRA Paper 118001, University Library of Munich, Germany.
    5. Olajide O. Oyadeyi & Sodiq Arogundade & Mduduzi Biyase, 2024. "How did African stock markets react to the Russia-Ukraine crisis “black-swan” event? Empirical insights from event study," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-13, December.
    6. Oyadeyi, Olajide, 2022. "Interest Rate Pass-Through in Nigeria," MPRA Paper 117954, University Library of Munich, Germany.

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