Monetary Policy Shocks and Industrial Output in Nigeria

Abstract

This study investigated the impact of monetary policy shocks on industrial output in Nigeria using restricted VAR (VECM) model and Granger causality test for the period 1970 to 2015. In doing this, data on the manufacturing and solid minerals subsectors was used for the analysis. Results show that contribution of manufacturing subsector to GDP responded positively to shocks in monetary policy, commercial bank credit to industrial sector and exchange rates, while contribution of solid minerals subsector to GDP responded positively to shocks in commercial bank credit to the industrial sector and exchange rate after the first year. On the other hand, the causality test result indicated a unidirectional causality running from monetary policy rate and exchange rate to the contribution of manufacturing sector to GDP on the one hand, and commercial bank credit to the industrial sector and exchange rate to the contribution of solid mineral sector to GDP on the other. Recommendations included; proper evaluation by the central bank of Nigeria of the possible responses of the different subsectors of the industrial sector in its decision regarding choice of monetary policy channel; the need for extreme caution to be taken in the management of exchange rate, and the need for CBN to do more to encourage commercial banks to allocate more of their loans to small scale investors in the manufacturing sector.