Monetary Policy Shocks and Output Growth in Nigeria: Which Shocks are more Important

Abstract

Purpose: Recognizing the importance of effective policymaking requires an understanding of Monetary Policy Shocks and Output Growth in Nigeria. The purpose of the paper is to examine how interest rate and exchange rate channels of the transmission mechanism affect output growth in Nigeria in response to monetary shocks. Methodology: The structural vector autoregression method is the empirical model. In the empirical analysis, quarterly data from 2000 to 2020 were used for the gross domestic product, nominal effective exchange rate, consumer price index, monetary policy rate, and open buyback. Findings: The results of the impulse response function showed that in Nigeria, monetary policy shocks are more significant because they have a long-lasting impact on growth up to the sixteenth quarter of the forecast horizon. Originality/value: The study's conclusions would enable Nigerian policymakers to anticipate consequences of monetary policy shocks through indirect demand-side Keynesian monetary policy transmission mechanism through the channels of exchange and interest rates. The study recommends that to move the economy toward pre-determined directions, monetary authorities should be cautious of the level/quantity of money in circulation rather than focusing on increasing or decreasing the monetary policy rate.