Abstract

In the past few years, the real sector became an area of interest in scholarly and public intellectual discuss, towards a sustainable performance of the Nigerian economy. Successive governments also realized the need to diversify the economy from high dependence on oil into deepening the real sector, through monetary policy that allows more credit flow to the real sector. In a quest to reconcile the current state of the Nigerian real sector with the renewed efforts of the government and the monetary authority to revamp the sector, this study investigated the effectiveness of this process and reexamined the transmission channels, using a structural vector autoregressive econometric approach (SVAR). The results showed that the credit channel and asset price channel are the dominant monetary policy transmission channels to the real sector. However, there was a significant effect on the effectiveness of the transmission process, when credit risk was added to the model, as it revealed vital information about the behaviour of the banking system in response to monetary policy actions of the monetary authority, during the period of high credit risk/default risk. This study, therefore, recommends that monetary authorities should always consider the credit preference of the banking system and the order of transmission channels, before embarking on any monetary policy aimed at stimulating the real sector and other sectors of the economy.

Highlights

  • The real sector is among the vital sectors of major economies of the world (Adeusi and Aluko, 2015)

  • In testing for the lag length criteria, the study considered Akaike information criterion (AIC), Hannan-Quinn information criterion (HQ), Schwartz information criterion (SC), and Final Prediction Error (FPE)

  • Evidence from published circulars by the Central Bank of Nigeria has shown that the monetary authority sometimes finds it challenging to influence the banking system to advance credit to the sector, in response to its monetary policy actions

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Summary

Introduction

The real sector is among the vital sectors of major economies of the world (Adeusi and Aluko, 2015) It is the productive sector of an economy, where goods and services are produced for consumption by various economic agents. In the past few years in Nigeria, the government and the monetary authority realized the need to diversify the economy from oil to deepening the real sector. This brought about a renewed emphasis and economic strategy to use the instruments of monetary and fiscal policies to improve the sector. There is no clear consensus among the authors till date as to the main channel of monetary policy transmission to the Nigerian real sector

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