JEFMS Journal

ABSTRACT:

Many studies on transmission mechanism of monetary policy only examine statistical relationship between policy variables and target variables. Most of these models may not be able to explain the pathway through which the monetary policies are transmitted. How monetary policy affects target goals can better be explained by chain and sequence of events known as path analysis. This paper tries to use mediation approach to assess the significance of causal path of monetary policy variables through the interest rate channel. The paper dwelt on the first transmission paths- from MPR to private sector credit through the interest rates. The Sobel test, which is one of the most widely used tests of indirect effect in simple mediation was employed in testing the significance of mediational path of the interest rate transmission mechanism of monetary policy. The results lay credence to effective and significant transmission of effects of monetary policy rates through maximum lending rate, interbank lending rate and treasury bill rate. These variables were found to be partial mediators in the transmission channel of interest rate. Only the prime lending rate was found not to significantly transmit the effect of monetary policy rate to private sector credit. The study concludes that the maximum lending rate path has the highest transmission effect of monetary policy rate. This is followed by the treasury bill interest rate path and the inter-bank call rate path respectively. The prime lending rate’s path was not significant at 5% level of significance. It is sacrosanct to also test if the private sector credit (PSC) can effectively transmits the effect from the maximum lending rate, inter-bank call rate and treasury bill interest rate to the target goals-inflation, output and unemployment in subsequent studies. These findings are new in the case of Nigeria as little or no studies have applied mediation approach to the study of transmission mechanism of monetary policy rate in Nigeria.

KEYWORDS:

mediation, monetary policy, interest rate, prime lending rate, maximum lending rate.

JEL CLASIFICATION:

E40, E52

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