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Interest Rate Channel and Real Economy in Nigeria: A Bayesian Vector Autoregression Approach

Author

Listed:
  • Kemisola Christianah Osundina

    (Department of Economics, Babcock University, Ilishan-Remo, Ogun State, Nigeria,)

  • Sheriffdeen A. Tella

    (Department of Economics, Faculty of Social and Management Sciences, Olabisi Onabanjo University, Nigeria,)

  • Bolaji A. Adesoye

    (Department of Economics, Faculty of Social and Management Sciences, Olabisi Onabanjo University, Nigeria.)

Abstract

This study examined the dynamic response of real economy to interest rate shocks using Bayesian vector autoregression model with Minnesota/Litterman prior criterion. Impulse Response Functions showed that all the variables were consistent with the theory apart from investment whose response was counter intuitive. Forecast Error Variance Decomposition confirmed theoretical interactions between Monetary Policy Rate through interest rate and inflation. Interest rate channel under this framework is effective to bring the economy to stability by suppressing inflation rate and bring it to normalcy in Nigeria with adverse effect on growth rate of Gross Domestic Product due to necessary and policy conflicts.

Suggested Citation

  • Kemisola Christianah Osundina & Sheriffdeen A. Tella & Bolaji A. Adesoye, 2018. "Interest Rate Channel and Real Economy in Nigeria: A Bayesian Vector Autoregression Approach," International Journal of Economics and Financial Issues, International Journal of Economics and Financial Issues, vol. 8(4), pages 313-321.
    • Handle: RePEc:eco:journ1:2018-04-39
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    References listed on IDEAS

    as
    1. Dedola, Luca & Lippi, Francesco, 2005. "The monetary transmission mechanism: Evidence from the industries of five OECD countries," European Economic Review, Elsevier, vol. 49(6), pages 1543-1569, August.
    2. Marta Bańbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92, January.
    3. Aliyu, Shehu Usman Rano & Englama, Abwaku, 2009. "Is Nigeria Ready for Inflation Targeting?," MPRA Paper 14870, University Library of Munich, Germany, revised 26 Apr 2009.
    4. repec:ulb:ulbeco:2013/13388 is not listed on IDEAS
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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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