Analyzing Interest Rate as A Monetary Transmission Channel Affecting Consumer Prices in Nigeria

This study analyzes the role of interest rate as a monetary transmission channel affecting consumer prices in Nigeria from 1996 to 2023. The research aims to determine the effectiveness of the interest rate channel in transmitting monetary policy impulses to consumer prices within the Nigerian economy. Employing a Structural Vector Autoregression (SVAR) model, the study investigates both the short-run and long-run dynamics among key macroeconomic variables, including money supply, interest rate, and consumer prices. The empirical findings reveal that an increase in money supply exerts a considerable inflationary effect over time and influences short-run interest rates, indicating that monetary aggregate expansion has an immediate effect on interest rates in Nigeria. However, the influence of money supply on interest rates does not have a significant impact on the general price level, suggesting that money supply affects consumer prices through other channels apart from the interest rate. Based on these findings, the study recommends that the Central Bank of Nigeria refine its monetary policy tools to ensure that changes in money supply are effectively targeted toward influencing key economic variables. Furthermore, deepening and improving the efficiency of Nigeria’s financial markets could enhance the transmission mechanism from interest rates to the broader economy. The study also underscores the importance of fiscal coordination, as the limited effect of money supply on prices through the interest rate channel indicates the need for a more harmonized macroeconomic policy framework.