Effect of Monetary Policy on Industrial Development in Nigeria; A Vector Error Correction Model

This paper analyzed the effect of monetary policy on the development of Nigeria's industrial sector using the Vector Error Correction Mechanism. The research used monetary policy rate, liquidity ratio, Treasury bill rate, money supply, and exchange rate as explanatory variables, while industrial development was represented by the value added of the industrial sector to the gross domestic product. To establish the existence of a cointegrating relationship in the model, a Johansen approach was adopted, which resulted in the use of the Vector Error Correction Model for estimation to ensure a parsimonious model. The results of the research revealed that the monetary policy rate has a significant negative effect on industrial development in both the short and long run, while the liquidity ratio had a significant positive effect on industrial development in both the long and short run. The Treasury bill rate had a significant positive long-run effect on industrial development. Money supply had a significant negative effect on industrial development in the long run. The exchange rate was found to have affected industrial development in both the short and long run in Nigeria. Based on the research, the study recommends that monetary policies be leveraged to enhance a favorable investment environment by promoting the emergence of market-based interest and exchange rate regimes, which will attract both domestic and foreign investments to Nigeria's industrial sector in the future.