Interest Rate Pass-Through to Macroeconomic Variables: The Nigerian Experience

International Journal of Economics and Finance; Vol. 5, No. 10, 2013

18 Pages Posted: 6 Aug 2014

Date Written: August 5, 2014

Abstract

The effectiveness of monetary policy depends on the adjustment response of Central Banks short-term interest rate on the real interest rates charged by commercial banks and ultimately on macroeconomic indicators of investment and consumption in the economy. Thus, the extent of interest rate pass-through largely depends on how effective the process of financial intermediation works and to what extent individual bank characteristics influence or hinder a perfect adjustment of product rates based on market conditions. The study examines the speed and completeness of pass-through from policy rates to retail bank rates and the effectiveness of monetary policy stance in influencing macroeconomic policy targets using a co-integration analysis based on Johansen and Juselius maximum likelihood and Engle-Granger two step procedures for the period 1970-2011. The VAR based Error Correction Model (ECM) and the Mean Adjustment Lag (MAL) was used to determine the short run estimates and asymmetric behaviour respectively. The study found an evidence of downward stickiness both in the short-run and long-run policy pass-through to the retail bank rates. In order to ensure robustness of the result, the Impulse Response Function (IRF) and Variance Decomposition (VD) analysis were conducted and similar slow and sluggish pass-through was obtained. The study as well, found pass-through from policy rate to macroeconomic variables to exhibit extremely rigid immediate responses.

Keywords: policy rate, retail bank rate, pass-through, macroeconomic indicators, co-integration

Suggested Citation

Ogundipe, Adeyemi and Alege, Philip Olasupo, Interest Rate Pass-Through to Macroeconomic Variables: The Nigerian Experience (August 5, 2014). International Journal of Economics and Finance; Vol. 5, No. 10, 2013. Available at SSRN: https://ssrn.com/abstract=2476363 or http://dx.doi.org/10.2139/ssrn.2476363

Adeyemi Ogundipe (Contact Author)

Covenant University ( email )

Canaanland
Km 10 Idiroko road
Ota, 24001
Nigeria
+2348161927372 (Phone)

Philip Olasupo Alege

Covenant University ( email )

P.M.B. 1023
Km 10 Idiroko road
Ota, Ogun State 234
Nigeria

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