A TYDL causality analysis of monetary policy performance and bank credit in Nigeria

This study examines the dynamic relationship between monetary policy instruments and bank credit performance in Nigeria, employing a combination of the Autoregressive Distributed Lag (ARDL) model and the Toda-Yamamoto-Dolado and Lutkepohl (TYDL) causality approach. Drawing on annual time series data, the study explores the short-run and long-run effects of key monetary policy variables, Monetary Policy Rate (MPR), Cash Reserve Ratio (CRR), Liquidity Ratio (LQR), Money Supply Growth Rate (MSGR), Interest Rate Spread (INTRSP), and Oil Price (OIL), on two measures of bank credit: Domestic Credit to the Private Sector (DCPS) and Loan-to-Deposit Ratio (LTDR).The ARDL results indicate that CRR, MSGR, and LQR have a significant influence on DCPS in the long run. At the same time, MPR exerts a negative impact, underscoring the limited effectiveness of interest rate tools in Nigeria’s monetary transmission mechanism. For LTDR, LQR and OIL prices emerge as key determinants, particularly in the short run. The error correction terms confirm the existence of stable long-run relationships across both models. The TYDL causality analysis uncovers bidirectional and unidirectional causal relationships, with CRR, MSGR, and LQR acting as central conduits for credit transmission. It was revealed that increasing money supply is the cause of changes in interest rates and liquidity metrics. Based on the findings, it was recommended that the Central Bank of Nigeria (CBN) should intervene in striking a balance between financial stability and credit expansion, and integrating fintech and digital lending platforms into the monetary policy framework to better capture informal credit dynamics.