Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Transmission Mechanism of Monetary Policy and the Effectiveness of
Monetary Policy in Nigeria: A Structural Approach
Louis Sevitenyi Nkwatoh
The role of monetary authorities in identifying the right channel by
using appropriate instruments to hit the immediate required target,
which will shorten the lag in response to monetary policy thus
leading to an effective monetary policy, is crucial. In Nigeria, the
main instrument used by Central Bank to influence the direction of
the cost of funds in the economy is the monetary policy rate
(MPR). Over the years, this rate has not effectively influenced both
the operational targets (interbank call rates and open-buy back
rates) and the intermediate targets of monetary policy, thus, failing
to attain the final goals of monetary policy (price stability and
sustainable economic growth). It there implies that CBN’s first step
in the transmission of monetary policy is weak. This study
therefore, investigated the different stages of the transmission
mechanism of monetary policy with the aim of identifying the most
effective channel for transmitting monetary policy effectively from
the instruments, to the intermediate targets via the operational
target, and to the final goals of monetary policy. The study used
secondary data and employed the ARCH and GARCH techniques
from the period 1996 to 2010. The results showed that, the
transmission of monetary policy is fairly strong in the first, second
and third stages. However, the interest rate effect dominates the
first two stages while the quantity effect dominates the last stage.
This implies that the effectiveness of monetary policy rate (MPR)
on the final goals depends on its effect on money supply. This
suggests that, effective open market operations (OMO) may be
critical to the effectiveness of monetary policy in Nigeria.
Jel: C5, E4, E50
Keywords: Monetary Policy, Transmission Mechanism, ARCH&GARCH Models,
Effective Monetary Policy.
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Yobe State Universty Damaturu, Nigeria. Email: Sevinkwatoh@Gmail.Com, Tel: +2348062218765