How Effective Is the Monetary Policy on the Real Sector in Nigeria?

Abstract

In the past few years, the real sector became an area of interest in scholarly and public intellectual discuss, towards a sustainable performance of the Nigerian economy. Successive governments also realized the need to diversify the economy from high dependence on oil into deepening the real sector, through monetary policy that allows more credit flow to the real sector. In a quest to reconcile the current state of the Nigerian real sector with the renewed efforts of the government and the monetary authority to revamp the sector, this study investigated the effectiveness of this process and reexamined the transmission channels, using a structural vector autoregressive econometric approach (SVAR). The results showed that the credit channel and asset price channel are the dominant monetary policy transmission channels to the real sector. However, there was a significant effect on the effectiveness of the transmission process, when credit risk was added to the model, as it revealed vital information about the behaviour of the banking system in response to monetary policy actions of the monetary authority, during the period of high credit risk/default risk. This study, therefore, recommends that monetary authorities should always consider the credit preference of the banking system and the order of transmission channels, before embarking on any monetary policy aimed at stimulating the real sector and other sectors of the economy.