The credit channels of monetary policy transmission: implications on output and employment in Nigeria


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There has been an increasing trend in the unemployment rate despite the growth rate witnessed. Monetary policy is presumed as one of the ways to improve the situation. Likewise, the relationship between monetary policy and employment has generated controversial debates in the literature. Though its connection has been extensively studied, however, the implications of monetary policy in respect to time frame perspectives on employment and output have not been widely addressed in the literature. This study provides evidence on shock effects, long and short-run impacts of monetary policy transmission through the credit channels on output and employment in Nigeria within the period of 1981 to 2016 using the Structural Vector Autoregression and Autoregressive distributed lags (ARDL). Evidence from the forecast error shock showed that variations in monetary policy indicators affect output more than employment in the first two periods; however, it affects employment more afterwards. The ARDL results show no evidence of co-integration when output is used as the dependent variable; conversely, cointegration exists when employment is used as the dependent variable. The monetary policy indicators: money supply, bank deposit liability and interest rate are statistically and economically significant with employment in the long run. In the short run, money supply and interest rate are economically and statistically significant. The findings revealed that the Nigerian government can maximize the long-run benefits of monetary policy through the credit channels on employment. Hence, there is a need for policymakers to look beyond short-run gain and promote long-run employment via monetary policy among others.

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    • Figure 1. Impulse response function of monetary policy indicators
    • Figure А1. Stability test for the structural VAR
    • Table 1. Summary of apriori expectation for model 2
    • Table 2. Summary of the ADF and PP unit root tests of the series
    • Table 3. Variance decomposition of monetary policy indicators
    • Table 4. ARDL bounds test
    • Table 5. Short and long-run results
    • Table 6. Diagnostic checks
    • Table A1. Residual serial correlation LM tests
    • Table A2. Structural VAR estimates