Monetary Policy and Credit Intermediation Nexus in Nigeria: Further Evidence

Abstract

Asymmetric variation in monetary policy causes substantial changes in the credit intermediation channel. This study investigates the link between monetary policy and credit intermediation in Nigeria, bringing further evidence, for the period 1986-2022. Utilizing the Fully Modified OLS estimation approach, the findings show that a tightening of monetary policy (i.e. a rise in the interest rate/ money supply contraction) leads to lower credit supply, while an expansionary monetary policy stimulates bank credit supply. Other variables that influence credit intermediation are capital adequacy ratio, size of economic activities and inflation rate. Financial development and the institutional quality variable are both positively related to credit intermediation but not significant. The paper suggests the implementation of appropriate monetary policy and strong institutional framework to encourage credit intermediation in Nigeria.

Keywords: Monetary policy, Credit intermediation, financial rigidities, Institutional quality, FMOLS