A Structural VAR Analysis of the Differential Effects of Monetary Policy Shocks on Some Nigerian Sectoral Outputs

Abstract

For some time now, monetary policy announcements have been mired with controversies, questioning the effectiveness or otherwise of the demand side management policy in Nigeria. Again, the transmission mechanisms of these policies and its effects on the economy have remained unclear to the public.  It is against this backdrop that this study investigated the effects of monetary policy shocks on sectoral components of the Nigerian economy using the Structural Vector Autoregressive (SVAR) model from 1961 - 2019. The Impulse Response Function (IRFs) was performed within the framework of SVAR to analyze the effects of the unanticipated monetary policy shocks on various sectors. The broad money supply, credit to the private sector, exchange rate and liquidity ratios have positive effects on the aggregate output and some selected sectoral components while interest rate and consumer price index have negative effects. The IRFs showed that the effects of monetary policy goes beyond the current year of  3 to 6 years before stabilizing while sectoral components have similar responses to the various monetary policy shocks. The results clearly show that the liquidity ratio is the most effective instrument for the control of aggregate output and not interest rate while broad money supply seems to be the most effective monetary policy instrument for the control of various sectors of the economy. The study therefore recommended among others adequate management of money supply, credit control; interest rate and foreign exchange market liberalization for improving sectoral output in Nigeria.