Transmission of Monetary Policy via the Interest Rate and Money Supply to Real Sector Output in Nigeria

This study examines the effectiveness of monetary policy transmission channels and their impact on real sector output in Nigeria from 1980 to 2023. Using Non-linear Autoregressive Distributed Lag (NARDL) Model. Findings of the F-Bound test of the NARDL model revealed that there exists a long-run relationship between monetary transmission channels and real sector output. The results of the joint asymmetries using the Wald test revealed that there exists an asymmetric effect of transmission channels on real sector output both in the short run and long run. Additionally, the findings of the model revealed that in the long run increase in interest rate has a negative and insignificant impact on real sector output in Nigeria whilethe decrease in interest rate has a positive and significant impact on real sector output in Nigeria. That is, lower interest rates enhance credit flow, especially to the major real sectors. Positive exchange rates, asset prices and money supply have a positive and significant impact on real sector output. By implication, a growing money supply enables businesses and households to access more funds from financial institutions through loans and investments. In the short run, a positive interest rate has a negative and insignificant impact on real sector output while a negative interest rate has a positive and significant impact on real sector output. Positive exchange rates and negative exchange rate hasa negative impact on real sector output but are significant for positive exchange rates. In addition, positive asset prices and money supply have a positive and significant impact on real sector output. However, negative asset prices and money supply have a negative and insignificant impact on real sector output. Based on the findings, the study recommends that the Central Bank of Nigeria should adopt an integrated policy framework by harmonizing monetary policy tools to channel funds to high-growth sectors while promoting export incentives and investor confidence, which would drive sustainable real sector growth in Nigeria.