Monetary Transmission Channel, Oil Price Shock and the Manufacturing Sector in Nigeria

Abstract

Abstract Research background: The need for diversification of the Nigerian economy has been emphasized and the manufacturing sector has a major role in this. Being an oil producing country, monetary policy is an important macroeconomic policy that has always been used to manage the influence of oil price shock on the manufacturing sector. Purpose: The study examines the relationship between oil price shock, the monetary transmission mechanism and manufacturing output growth in Nigeria. Research methodology: The study applied the structural vector auto regression (SVAR) modelling technique and a descriptive analysis. Results: The results of the study show that the exchange rate is mostly affected by the oil price shock, while the monetary policy instruments and inflation rate are also very responsive to the exchange rate shock. The manufacturing sector output growth has also been shown to be strongly affected by the inflation rate and monetary policy shocks. Novelty: The study has revealed the most effective channel via which oil price shocks affect manufacturing output. The exchange rate channel of the monetary policy transmission mechanism is the most significant channel through which oil price shock affects manufacturing output growth in Nigeria. This shows that effective management of the exchange rate policy via the appropriate monetary policy approach can be used to minimize the adverse effect of oil price shocks on Nigerian manufacturing output.