The effectiveness of monetary policy transmission in Nigeria: Evidence from the monetary policy rate and the Cash Reserve Ratio

This paper investigates the effectiveness of the Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR) as policy instruments in Nigeria. A structural VAR model is employed to simulate two distinct models measuring shocks from the MPR and the CRR using monthly data from January 2006 to December 2023. Findings show that contractionary monetary policy impulses using MPR and the CRR contract output and credit to the private sector, inflation remains largely positive in the two models, known as the "price puzzle", but the puzzle is more persistent in the MPR equation. Moreover, shock to MPR strongly influences short-term interest rates (treasury bill rate) only within 3 months. This is similar to the impact of CRR on banks' reserves which remains positive for the latter part of the horizon. Thus, the study concludes that the MPR exhibits a rapid wide-ranging impact on the selected variables, offering a balanced method for controlling credit growth, interest rates, and liquidity. However, supportive channels may be needed to counteract inflationary trends. Finally, the study recommends improved focus on supply-side limitations, clear communication between expectations and policy measures, deeper financial markets and alternate funding sources.