An Empirical Analysis of Monetary Policy Transmission Instruments and Non-oil Real Sector Private Investment in Nigeria
Asian Journal of Economics, Business and Accounting,
Page 34-53
DOI:
10.9734/ajeba/2022/v22i1930657
Abstract
In recent times, the performance of Non-oil real Private investment in Nigeria has remained suboptimal. This has been generally attributed to ineffective monetary policy, among others. This study therefore examines the impact of selected Monetary Policy transmission instruments namely: Monetary Policy Rate (MPR), Cash Reserve Ratio, (CRR) Liquidity Ratio, (LR) and Foreign Exchange Rate (NFXR), on Non-oil Real Sector Private Investment (NRSPI). The time series data is sourced from CBN, spanning through a period of 1981 to 2020. Johansen Co-integration and Error correction model (ECM) econometric analysis was employed.The empirical findings established that in the long run, inverse and significant relationships exist between (NRSPI) and MPR, LR, and CRR while FXR is positively and significantly related. The coefficient of the ECM (-1.16) which measures NRSPI’s speed of equilibrium adjustment to changes in the selected policy instruments, is significant and correctly signed. It suggests that in the long run, NRSPI adjusts slowly to short-run disequilibrium in the selected policy instruments; indicating a lag effect. Overall, the policy instruments do not contribute effectively to NRSPI growth in Nigeria. Therefore, the monetary authorities should lay emphasis on aligning their policy contractionary measures, to reduce adverse effect of these selected instruments, They should maintain optimal lending rate that reflects the overall internal rate of return on investment, with due attention to market fundamentals. Lastly, Policy makers should take into consideration the lag effect, and design policies in line with the magnitude of expected changes.
Keywords:
- Monetary policy instruments
- Non-oil real private investment
- Co-integration and error correction models
How to Cite
Uwakaeme, O. S. (2022). An Empirical Analysis of Monetary Policy Transmission Instruments and Non-oil Real Sector Private Investment in Nigeria. Asian Journal of Economics, Business and Accounting, 22(19), 34-53. https://doi.org/10.9734/ajeba/2022/v22i1930657
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Available:www.iiard.pub.org.
Adeoye BW, Shobande OA. Transmission Mechanism and macroeconomic aggregate in Nigeria. Caleb Journal of Social and Management Sciences. 2017;3(2):115–134.
Available:https://doi.org/1026772/cjsms/2017030206
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Jayaraman TK. Private Investment and Macroeconomic Environment in the South Pacific Island Countries: A Cross-Country Analysis, Occasional Paper No.14, Asian Development Bank, Manila; 1996.
Nnanna JO, Englama MA, Odoko FO. Finance,Investment and Growth in Nigeria. iCBN Publication, Kas Arts Services, Abuja; 2004.
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Keynes JM. The General Theory of Employment, Interest and Money: London and New York; 1936.
Dixit AK, Pindyck RS. Investment under Uncertainty. Princeton: Princeton, University Press; 1994.
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Bernanke BS, Gertler M. Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives. 1995;9:27–48.
Francis ON, Eugene OI. Monetary Transmission Mechanism in Nigeria: A FavarApproach. International Journal of Economics and Finance. 2015;7(8):229 - 237
Dedela L, Lippi F. The Monetary Transmission Mechanism: Evidence from the Industries of Five OECD Countries. European Economic Review. 2005;49 (6):1543-156939.
Gujarati DN, Porters. Basic Econometrics” (5thEd.), Mc Graw -Hill International, Singapore; 2009.
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Johansen S. Estimation and Hypothesis testing of Co-integration vectors in Gaussian Vector Autoregr essive Model’s. Econometrica. 1995;59.
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Obstfeld M, Rogoff K. Exchange Rate Dynamics Redux. Journal of Political Economy. 1995; 103:624–660.
Gertler Mark, Gilchrist, Simon. Monetary Policy Business Cycles and Behaviour of Small Manufacturin Firms 1994.Quaterly Journal of Economics. 1994;109(2):309–340.
Culbertson JM. ‘The Lag in the Effect of Monetary Policy: Reply’ Journal of Political Economy. 1961;3:80–103.
Belongia T, Wang.The Effect of Management Decision on Agricultural Bank Facilities. American Journal of Agricultural Economics (Nov.); 2003.
Chen, Yanguang. Spatial Autocorrelation Approaches to Testing Residuals from Least Squares Regression. 2016;11(1):77-817.
Modigliani F. The Monetary Mechanism and its interactionwith real Phenomena. Review of Economics and Statistics Supplement. 1963;79.
Nampewo D, Munyambonera E, Lawanga MM. Sectoral Effects of Monetary Policy in Uganda Journal of Empirical Economics. 2013;1(2):43-58.
Nwosa PI, Shaibu MO. The Monetary Policy Transmission Mechanism in Nigeria: ASectoral Output Analysis. International Journal of Economics and Finance. 2012; 4(1).
Available:www.ccsenet.org/ijef.
Olatunji S, Babatunde A. Monetary Policy Transmission Mechanism and Macroeconomic Aggregates in Nigeria. Caleb Journal of Social and Management Sciences. 1986 – 2016 International Institute of Academic Research and Development (IIARD), pOLICY. 2017; 3:115-134.
Rodrik D. Policy Uncertainty and Private Investment: Developing Countries” Journal of Development Economics. 1991;32: 2.
Taolam JG. Monetary Transmission Mechanism. IMF Workshop on Monetary and Exchange Rate Policy, Bangkok, Thailand; 2014.
Tobias O, Manbo C. The Effect of Monetary Policy on Private Sector Investment in Kenya.Journal of Aj› Jlied Finaiic’e & Bmking. 2012;2(2):239-257.
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openknowledge.worldbank.org
Available:www..indexmurdic.
United Nations. Innovation for Sustainable Development,NY:United Nations Publication; 2015.
Available:www.sustainabledevelopment.un.org
CBN (Real Sector Division, Research Department). Effects of Monetary Policy on the real Economy of Nigeria: A Disaggregated Analysis.CentralBank of Nigeria, Abuja, Publication; 2014.
Central Bank of Nigeria (CBN).CBN Statistical Bulletin and Annual Report and Statement of Account. Abuja; 2020.
Oyeyemi D. The Effectiveness of Monetary Policy Instruments in Nigeria: A Time Series Approach; 2019.
Available:https://www.academia.edu. (Aug)
UNCTAD. World Investment Report on Towards a NewGeneration of Investment Policies; 2012.
Available]:unctad.org/en/Publications Library/2012overview_e n.pdf.
Frimpang JM, Maubuah G. Determinants of Private Sector Investment in Ghana: An ARDL Approach. European Journal of Social Science. 2010;15(2).
Adeleke IA, Uboh VI, Shobande OA. Monetary Policy Towards Inclusive Growth in Nigeria. The Nigerian Journal of Economics and Social Studies. 2015; 57(2):313-337.
Amoo BA, Eborieme M, Mbutu OM, Igue NN, Adamu Y. Effects of Monetary Policyon the real Economy of Nigeria: A Disaggregated Analysis. Published by the Real Sector Division, Research Department, CBN Abuja PG. 2014;1- 3.
Ireland P. Monetary Policy Transmission Mechanism. IMF Working Papers. 2015;6(1):1.
Lucky AL, Uzah CK. Monetary Policy TransmissionMechanisms and Domestic Real Investment in Nigeria: A time Series Study 1981-2015. International Journal ofEconomics and Financial Management. 2018;2(2):136-161.
Available:www.iiard.pub.org.
Adeoye BW, Shobande OA. Transmission Mechanism and macroeconomic aggregate in Nigeria. Caleb Journal of Social and Management Sciences. 2017;3(2):115–134.
Available:https://doi.org/1026772/cjsms/2017030206
IMF. Monetary and Fiscal Policy Designs: Issues in low- income Countries Policy Development and Review Dept. and Fiscal affairs Dept) Washington DC IMF; 2005.
Carl E. Walsh. Monetary Theory and Policy. The MIT Press (3rd Edition). 2010;87–89.
Mitcheli, Williams. Modern Monetary Theory and Practice; An Introductory Text. (First Edition). ISBN – 2016;10 (1530338794):361–3.
Vinayagathasan T. Monetary Policy and RealEconomy: A Structural VAR Approach for Sri Lanka. National Graduate Institutebfor Policy Studies. Rappongi M inato-ku, Tokyo,Japan, 2013;2(1):106- 186.
Ochieng OB. Modeling Interest Rate on Economic Growth in Kenya: (The GARCH Model). Management and Economic Journal.Everant Publisher, Pvt Ltd. 2018;2(7):361-115.
Yue V, Shuanglong Z. An Empirical Analysis of Monetary Policy Transmission through Interest rate channel in China. China Business Review. ISSN 1537–1506. USA. 2007;6(3)451:8 – 26.
Adelowokan OA, Adesoye AB, Balogun OD. Exchange Rate Volatility on Investment and Growth in Nigeria, an Empirical Analysis. Global Journal of Management and Business Research. 2015;5(10):1-11.
Kapuscinski MA. The role of Bank balance Sheet in monetary policy transmission: Evidence from Poland. Narodowy Bank Polski (NBP) Education & Publishing Department, Warszawa, Poland, NBP Working Paper. 2015;245:1- 43.
Ndikumana L. Implications of Monetary Policy, Credit and Investment in Sub- Saharan African Countries, Department of Economics and Political Economy Research Institute, University of Massachusetts at Amherst; 2014.
Nuwagira Wilberforce. An empirical investigation of Exchange rate passthrough to inflation in Rwanda. BNR Economic Review. 2015;7:53-78.
Adeoye BW, Shaibu MO. Monetary policy shocks and exchange rate volatility in Nigeria. Asian Economic and Financial Review. 2014;4(4):544–562.
Obafemi FN, Ifere EO. Monetary Policy Transmission mechanism in Nigeria: SVAR Approach: International Journal of Economics and Finance. 2015;7(8):229-239.
Central Bank of Nigeria (CBN).CBN Statistical Bulletin and Annual Report and Statement of Account. Abuja; 2019.
Mesagan DP, Shobande OA. The Role of Central Bank in Nigerian Economy. CITN Review. 2016;7(1):25-34.
Obadeyi J, Akingunola R, Afolabi V. Interest Rate Targeting: A Monetary Policy Tool for Economic Growth in Nigeria (Stakeholders Approach) Journal of Advances in Economics and Business. 2013;1(2):103–123.
Ndekwu EC. Analysis of Monetary Policy Transmission Mechanism and Real Economy in Nigeria. CBN Occasional Paper. 2013;43:1-83.
Mordi NO, Englama M, A and BS. Adebusuyi.The Changing Structure of the Nigerian Economy. CBN Research Department Publication, Atisele Vanessa Cards Coy. Lagos; 2010.
Nurul SA. Macroeconomics Principles, Applications and Policy Implications. Congnell Academic Publisher, Canada; 2019.
Ackley G. Macroeconomics Theory and Policy, Collier – Macmillan, Hong Kong. 1978;78 – 89.
Froyen RT, Guender AV. T he Real Exchange Ratein Taylor rules. A Reassessment. Economic Modeling Elsevier. 2018;73(2):140–151.
Ramesh, Chandra D. The Impact of Monetary Policy in the 20th Century Emerald Publishers. 2019;2:102–122.
Dornbusch R, Fischer S, Richards S. Macroeconomics 8th Edition Tata, Mc. Gray-Hill Companies. Icn. ISBN 0-07-047434-6. International Settlements. 2002; (26):245 -269.
Stiglitz E. Banks versus markets as Mechanism for allocating and Coordinating Investment. NBER Working Paper; 1993.
Arrow K. Optimal Capital Policy with Irreversible Investment” in Server, L., et al. Private Investment and Macroeconomic Adjustment: A Summary. The World Bank Research Observer. 1968;7(1).
Agagi G. Capital Formation and Nigerian Economy. Journal of Economicsand Annual Review. 2017;38(2):28-42.
Due JE, Friedlander AF. Government Finance and Economics of the Public Sector; Richard, D, IrwinInc. Homewood Illinous. 1977;60430.
Zebib M, Muoghalu M. Dynamic Nature of Private Investment and its Determinants in Developing Countries” .Studies in Economics and Finance. 1998;18.
Jayaraman TK. Private Investment and Macroeconomic Environment in the South Pacific Island Countries: A Cross-Country Analysis, Occasional Paper No.14, Asian Development Bank, Manila; 1996.
Nnanna JO, Englama MA, Odoko FO. Finance,Investment and Growth in Nigeria. iCBN Publication, Kas Arts Services, Abuja; 2004.
Jorgensen D. Capital Theory and Investment Behaviour”. American Economic Review. 1963; 53:247-259.
Keynes JM. The General Theory of Employment, Interest and Money: London and New York; 1936.
Dixit AK, Pindyck RS. Investment under Uncertainty. Princeton: Princeton, University Press; 1994.
Tobin J. A General Equilibrium Approach to Monetary Theory Journal of Money, Credit, and Banking; 1969.
Kiley M, Roberts J. Monetary Policy in a low interest rate world, Brookings Paper on Economic Activity.Spiring. 2017;2:317- 396.
Ando A, Modigliani F. Lags in Fiscal and Monetary Policy’ in Commission on Money and Credit Stabilization Policies, Prentice Hall Inc, Englewood Cliffs. 1968;28.
Bernanke BS, Gertler M. Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives. 1995;9:27–48.
Francis ON, Eugene OI. Monetary Transmission Mechanism in Nigeria: A FavarApproach. International Journal of Economics and Finance. 2015;7(8):229 - 237
Dedela L, Lippi F. The Monetary Transmission Mechanism: Evidence from the Industries of Five OECD Countries. European Economic Review. 2005;49 (6):1543-156939.
Gujarati DN, Porters. Basic Econometrics” (5thEd.), Mc Graw -Hill International, Singapore; 2009.
Campbell, Donald T, Stanley JC. Experimental and Quasi-experimental Designs for Research. Rand McNally & Coy; 1963.
Granger CWJ. Some Properties of Time Series Data and their use in Econometric Model; 1981.
Johansen S. Estimation and Hypothesis testing of Co-integration vectors in Gaussian Vector Autoregr essive Model’s. Econometrica. 1995;59.
Mackinnon JA. Critical Values for Cointegration Tests” in R. F. Engle and C. W. Granger (eds) Long-run Economic Relationships. Readings in Cointegration. Advanced text in Econometrics, Oxford University Press; 1991.
Granger CWJ, Newbold P. Spurious Regression in Econometrics. Journal of Econometrics. 1993;2.
Engel RF, Granger CWJ. Co-integration and Error Correction Representation Estimation and Testing. Econometrica. 1987;55.
Dickey D, Fuller W. Likelihood Ratio statistics for Autoregressive Time series with unit Root. Econometrica. 1981;83:49
Obstfeld M, Rogoff K. Exchange Rate Dynamics Redux. Journal of Political Economy. 1995; 103:624–660.
Gertler Mark, Gilchrist, Simon. Monetary Policy Business Cycles and Behaviour of Small Manufacturin Firms 1994.Quaterly Journal of Economics. 1994;109(2):309–340.
Culbertson JM. ‘The Lag in the Effect of Monetary Policy: Reply’ Journal of Political Economy. 1961;3:80–103.
Belongia T, Wang.The Effect of Management Decision on Agricultural Bank Facilities. American Journal of Agricultural Economics (Nov.); 2003.
Chen, Yanguang. Spatial Autocorrelation Approaches to Testing Residuals from Least Squares Regression. 2016;11(1):77-817.
Modigliani F. The Monetary Mechanism and its interactionwith real Phenomena. Review of Economics and Statistics Supplement. 1963;79.
Nampewo D, Munyambonera E, Lawanga MM. Sectoral Effects of Monetary Policy in Uganda Journal of Empirical Economics. 2013;1(2):43-58.
Nwosa PI, Shaibu MO. The Monetary Policy Transmission Mechanism in Nigeria: ASectoral Output Analysis. International Journal of Economics and Finance. 2012; 4(1).
Available:www.ccsenet.org/ijef.
Olatunji S, Babatunde A. Monetary Policy Transmission Mechanism and Macroeconomic Aggregates in Nigeria. Caleb Journal of Social and Management Sciences. 1986 – 2016 International Institute of Academic Research and Development (IIARD), pOLICY. 2017; 3:115-134.
Rodrik D. Policy Uncertainty and Private Investment: Developing Countries” Journal of Development Economics. 1991;32: 2.
Taolam JG. Monetary Transmission Mechanism. IMF Workshop on Monetary and Exchange Rate Policy, Bangkok, Thailand; 2014.
Tobias O, Manbo C. The Effect of Monetary Policy on Private Sector Investment in Kenya.Journal of Aj› Jlied Finaiic’e & Bmking. 2012;2(2):239-257.
World Bank. World Bank Annual Report; 2020.
openknowledge.worldbank.org
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