Monetary Policy, Bank Lending and Inflation in Nigerian; 1993-2009

Abstract

This paper investigates whether bank-lending behaviour can provide a convincing explanation for the effects of monetary policy on inflation over the period 1993-2009. This period was selected on account that it marks the beginning of indirect monetary policy regime in Nigeria. Applying the ADF and PP-test to determine the stationary state of our data, the result shows that the variables are not stationary at their level except the prime lending rate. Therefore, a cointegration test was carried out to test the existence of a long run relationship in our data. However, we were not able to determine this. As such we apply the Vector Auto Regression (VAR) technique to determine the effects of monetary policy on inflation through the bank lending channel. More also, in order to consolidate our findings; we applied the impulse response function and forecast error variance. Our findings from this paper do not support the existence of bank lending channel of monetary policy transmission in Nigeria. This is so since monetary policy done through the setting of interest rate does not have the intended effects on bank lending behaviour. More also, bank lending has no significant effects on inflation. Therefore, the conclusion from our study is that bank lending cannot provide convincing explanation effects of monetary policy on inflation in Nigerian economy.