Interest Rate Channel of Monetary Transmission and Real Sector Output in Nigeria

Abstract

This study examines the interest rate channels of monetary transmission and real sector output in Nigeria from 1980 -2021. The study used annual secondary data and were analysed using the Nonlinear Autoregressive Distributed Lag (NARDL) Model. Findings show that interest rate and inflation negatively impacted real sector output in Nigeria over the period of the study. This means that a higher interest rate and inflation rate translate to a lowering of the output of the real sector in Nigeria. Findings further reveal that asset price and exchange rate positively impact real sector output. However, in terms of the sizes of the estimated coefficients, asset price had the most negligible impact on real sector output. At the same time, the exchange rate channel exerted a more significant impact on real sector output in Nigeria. Based on the findings, the study recommends that the monetary authority in Nigeria should maintain low and stable interest and inflation rates. The low-interest rate should be maintained to encourage borrowing for investment purposes.