The Disaggregated Impact of Financial Development on the Effectiveness of Monetary Policy in Nigeria

Abstract

The fast development in the financial system has attracted researchers’ interest in studying its implication on the economy, though empirical evidence is highly limited on disaggregated levels. This study is undertaken to examine the impact of disaggregated financial development on the effectiveness of monetary policy in Nigeria. The study used Autoregressive Distributed Lag Model to capture the data-generating process as well as both short-run and long-run relationships. The scope of analysis ranged from 2000 quarter 1 to 2021 quarter 4 to circumvent the effect of regime changes, as the chosen time horizon represents the period of the uninterrupted civilian regime in Nigeria. The data are sourced from the Central Bank of Nigeria’s and the International Monetary Fund’s statistical databases. Moreso, quarterly frequency data are used to reflect the short-run nature of the monetary policy. The finding reveals financial market development enhances the effectiveness of monetary policy in terms of achieving both its primary and secondary objectives while financial institutions development does not. Given the findings, it is recommended that the Government together with the Central Bank of Nigeria should design policies that would enhance the efficiency of the financial market, particularly markets infrastructure and technology-based products to reduce information asymmetry and transactional costs to ease the way of doing business.