Monetary Policy Transmission Mechanism in Nigeria: A Comparative Analysis

Abstract

Empirical evidence has shown that the result of the exact channel of monetary policy transmission in Nigeria is mixed. This paper compared the Factor-augmented vector–auto regression (FAVAR) framework which exploits large data set of 53 with the traditional VAR model that estimates 6 variables to ascertain the exact channel of transmission. Findings from the two models conclude that although both methods generate qualitatively related results, but the FAVAR model is a superior alternative over VAR on grounds that monetary policy shocks are better identified using the FAVAR model. Also the FAVAR model does not exhibit the prize puzzle problem found in the VAR but allows for the computation of impulse responses of a large number of variables. Results from both models show that interest rate and credit channels are dominant and strongest channels of monetary policy transmission in Nigeria. Exchange rate and money channels were not significant and pronounced.