Impact of Credit Channel of Monetary Policy Transmission Mechanism on the Nigerian Economy

Abstract

This study is predicated on the long age debate among scholars and Theorists with respect to monetary policy transmission mechanism. Some schools of thought believe that money does not matter and monetary policy is ineffective in influencing real economic variables such as employment and real output. While other schools claim that money matters and monetary policy can influence real economic activities at least in the short run. The last school of thought is those in between these two opponents who believe that the link between money and output is actually reverse causation not the other way round. These controversies revolve on the issue of ascertaining the channel of transmitting monetary policy actions into the economy. Therefore, using the Vector Autoregressive (VAR) Model, this study sought to empirically analyze credit channel of monetary policy transmission mechanism in Nigeria. Applying the time series data spanning the periods of 56 years 1960-2016, the empirical analysis found four interesting results as follows: firstly, all the credit channels variables were non stationary at levels but appears stationary at first difference. Secondly, there is a short run link between credit channel and Nigeria economic growth. Thirdly, there exists a long run equilibrium relationship between credit channel and economic growth in Nigeria. Fourthly, there is evidence of causality running from credit channel to economic growth in Nigeria. Thus, the study came out with one stylized fact about monetary policy transmission mechanism in Nigeria as follows: that the credit channel of monetary policy transmission mechanism are fully effective, operational and promote economic activities in Nigeria and that the effective propagation of monetary policy in Nigeria are done through the credit channel. Based on the findings above, the study recommends that the policy approach of encouraging, emphasizing and arousing the good management of credit channel of the transmission mechanism in Nigeria should be vigorously pursued. This has the ability to trigger up growth in various sectors of the Nigerian economy.