Interest Rate Channel and Real Economy in Nigeria: A Bayesian Vector Autoregression Approach

Kemisola Christianah Osundina, Sheriffdeen A. Tella and Bolaji A. Adesoye
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Kemisola Christianah Osundina: Department of Economics, Babcock University, Ilishan-Remo, Ogun State, Nigeria,
Sheriffdeen A. Tella: Department of Economics, Faculty of Social and Management Sciences, Olabisi Onabanjo University, Nigeria,
Bolaji A. Adesoye: Department of Economics, Faculty of Social and Management Sciences, Olabisi Onabanjo University, Nigeria.

International Journal of Economics and Financial Issues, 2018, vol. 8, issue 4, 313-321

Abstract: This study examined the dynamic response of real economy to interest rate shocks using Bayesian vector autoregression model with Minnesota/Litterman prior criterion. Impulse Response Functions showed that all the variables were consistent with the theory apart from investment whose response was counter intuitive. Forecast Error Variance Decomposition confirmed theoretical interactions between Monetary Policy Rate through interest rate and inflation. Interest rate channel under this framework is effective to bring the economy to stability by suppressing inflation rate and bring it to normalcy in Nigeria with adverse effect on growth rate of Gross Domestic Product due to necessary and policy conflicts.

Keywords: Minnesota/Litterman Prior; Bayesian. (search for similar items in EconPapers)
JEL-codes: C11 C58 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eco:journ1:2018-04-39

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