THE INTEREST RATE CHANNEL OF MONETARY POLICY TRANSMISSION MECHANISM IN NIGERIA: A REGIME-BASED ANALYSIS

Abstract

This study re-examines the interest rate channel of monetary policy transmission in Nigeria, against the backdrop of the changing macroeconomic conditions in the economy, which has seen inflation rise above the CBN single-digit threshold over the last five years, as well as GDP that has slipped into the negative territory for seven times since 2016Q1 till date. The study adopted the non-ARDL technique, an asymmetric method of ascertaining the passthrough of interest rate in two different regimes of positive and negative output growth. Findings from the estimates of both a linear and non-linear autoregressive model suggests that in the regime of positive output growth, the interest rate passthrough for Nigeria is negative and statistically insignificant, also, in the regime of negative output growth, the interest rate passthrough for Nigeria is equally negative and insignificant. However, the passthrough of interest rate during the regime of positive output growth appears to be higher and faster, compared with the regime of negative output growth, as during the regime of positive output growth which is synonymous to boom cycle in the business environment, banks are poised to lend to the private sector, due to increased productivity and investment in this regime. The study recommends that policy initiatives be directed at reducing the cost of operation of banks in Nigeria, as well as, bridging the gap between the policy rate and the real rate of lending, which would enhance and boost investment and output growth in the economy.