Abstract
Monetary policy is aimed at attaining price stability, full employment and moderate long-term interest rates in the economy based on regulatory authority priorities, prevailing economic and financial conditions. Using annualized time series data from DMBs in Nigeria and the Vector Error Correction Model (VECM) as well as the simulates generalized impulse response functions, this study assessed the dynamic interactions between bank lending and monetary policy by observing how banks’ lending patterns are influenced by changes in monetary policy over the years in Nigeria.The result revealed that bank lending responds to short run changes in monetary policy but there is no long run influence from monetary policy to bank loan as banks adjust their portfolio mix in line with the prevailing monetary policy. Similarly, it revealed that changes in monetary policy often create fluctuations on bank health and as such regulatory authority must focus on factors such as monetary policy rate and bank capital that influence bank position in order to attain a significant economic performance using banks as a monetary policy transmission mechanism to the economy.
Highlights
IntroductionMonetary policy is aimed at creating a functional means of managing interest and employment rate
In every economic setting, monetary policy is aimed at creating a functional means of managing interest and employment rate
It revealed that changes in monetary policy often create fluctuations on bank health and as such regulatory authority must focus on factors such as monetary policy rate and bank capital that influence bank position in order to attain a significant economic performance using banks as a monetary policy transmission mechanism to the economy
Summary
Monetary policy is aimed at creating a functional means of managing interest and employment rate. The prime motive is the maintenance of price stability by the apex/regulatory bank which motivate long-term economic growth and employment (Turguttopbas, 2017). The key monetary policy components comprise Open Market Operations (OMO), discount rate and reserve requirements fixed by the central banks. The OMO involved trading activities by central banks on government financial securities at market determined prices while the discount rate represent the interest rate charged by central banks on short-term loans to depository institutions. A reduction in the central bank discount rate is an expansionary policy because it influences other interest rates in the economy and vice versa. The reserve requirements affect depository institution liquidity as it influence the size of fund available for money creation. A decline in the central bank stipulated reserve www.cribfb.com/journal/index.php/amfbr
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