Monetary Policy and the Real Economy: A Study of the Manufacturing and Services Sectors in Nigeria

Main Article Content

Olumuyiwa Olamade


This study examined the effect of monetary policy on the real sector of the Nigerian economy. A model was specified for each of the manufacturing and services sectors to interrogate the effect of monetary policy on the real sector. Annual data were sourced from the World Development Indicators for 1981 to 2017. Preliminary tests of the time series properties suggested the autoregressive distributed lag (ARDL) regression as the most appropriate framework for the achievement of our objectives. Diagnostic tests of the distribution of regression errors confirmed the satisfaction of all necessary regression assumptions. The models were also found stable over the study period. Thus, the models adequately represented the problems formulated for investigation and good for valid inference. While all the four channels of monetary transmission considered were found significant for value-added expansion in manufacturing, the exchange rate channel was not a significant factor in value-added change in the services sector. Our findings suggested that domestic credit is the dominant channel for the transmission of monetary impulses to the real sector. The study concluded that monetary policy will benefit the real economy more with export expansion in both the manufacturing and services sectors.

ARDL, monetary policy, manufacturing, services, diagnostics, Nigeria.

Article Details

How to Cite
Olamade, O. (2019). Monetary Policy and the Real Economy: A Study of the Manufacturing and Services Sectors in Nigeria. Journal of Economics, Management and Trade, 25(1), 1-13.
Original Research Article


Economic recovery and growth plan 2017-2020. Federal Republic of Nigeria.
[Accessed 24 May 2019]

Mathai K. Monetary policy: Stabilizing prices and output. Finance & Development; 2018.
[Accessed 24 May 2019]

Poole W. Optimal choice of monetary policy instruments in a simple stochastic macro model. Quarterly Journal of Economics. 1970; 84:197–216.

Ireland PN. The monetary transmission mechanism. Working Paper No. 06‐1, Federal Reserve Bank of Boston. 2005;1-13.
[Accessed 24 May 2019]

Usman OA, Adejare AA. Impact of monetary policy on industrial growth in Nigeria. International Journal of Academic Research in Business and Social Sciences. 2014;4(1):2222-6990.

Molho LE. Interest rates, saving and investment in developing countries: A reexamination of mckinnon-shaw hypothesis. IMF Staff Paper. 1986;83 (1):90-116

Athukorala PC. Interest rates, saving and investment: Evidence from India. Oxford Development Studies. 1998;26(2):153-169. [Acceesed on: 5 June 2019]

Mishkin FS. Symposium on the monetary transmission mechanism. Journal of Economic Perspectives. 1995;9:3–10.

Clarida R, Gali J, Gertler M. Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics. 2000;115(1):147-80.

McKinnon R. Money and capital in economic development. Brookings: Brookings Institution Press; 2010.

Shaw E. Financial deepening in economic development. New York: Oxford University Press; 1973.

Barro RJ, Becker GS. Fertility choice in a model of economic growth. Econometrica. 1989;57:481-501.

Loayza N, Schmidt-Hebbel K. Monetary policy functions and transmission mechanisms: An overview. In Loayza N, Schmidt-Hebbel K, editors. Monetary policy rules and transmission mechanism. Central Bank of Chile, Santiago, Chile; 2002.
[Accessed 24 May 2019]

Bernanke BS, Gertler M. Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives. 1995:9;27–48.

Lopes FL. The transmission mechanism of monetary policy in a stabilising economy: Notes on the case of Brazil. BIS Policy Papers. 1998;3:65-72.
[Accessed 5 June 2019]

CBN (Series 15). What is the balance sheet channel of monetary policy transmission?
[Accessed 24 May 2019]

Holmstrom B, Tirole J. Financial intermediation, loanable funds and the real sector. Quarterly Journal of Economics. 1997;112(3):663–691.

Berg A, Charry L, Portillo R, Vlcek J. The monetary transmission mechanism in the tropics: A narrative approach. IMF Working Paper. 2013;WP/13/197:1-38.
[Accessed 5 June 2019]

Igan D, Kabundi A, Nadal De Simone F, Tamirisa N. Monetary policy and balance sheets. IMF Working Paper. 2013; WP/13/158:1-38.
[Accessed 24 May 2019]

Ndekwu EC. An analysis of the monetary policy transmission mechanism and the real economy in Nigeria. Occasional Paper. Central Bank of Nigeria. 2013;43:1-90.
[Accessed 24 May 2019]

Adekunle PA, Baba N, Yaaba BN, Stephen SA, Ogbuehi F, Idris A, Zivoshiya PB. Monetary policy transmission in Nigeria: How important is asset prices channel? Microeconomics and Macroeconomics. 2018;6(3):55-66.

Adeoye B. Shobande A. Monetary policy transmission mechanism and macroeconomic aggregates in Nigeria. Caleb Journal of Social and Management Sciences. 2017:3(2):115-134.

Wei WWS. Time series analysis: Univariate and multivariate methods. 2nd ed, Boston: Pearson, Addison, Wesley; 2006.

Rummel O. Estimating a long-run money demand equation for the United States: An exercise involving unit roots and cointegration. Centre for Central Banking Studies, Bank of England. 2015;1-89. [Accessed 24 May 2019]


Ng S, Perron P. Lag length selection and the construction of unit root tests with good size and power. Econometrica. 2001;69: 1519-1554.

Kwiatkowski D, Phillips PCB, Schmidt P, Shin Y. Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics. 1992;54: 159-178,

Maddala GS, Kim IM. Unit roots, cointegration and structural change. Cambridge, Cambridge University Press; 1998.

Engle R, Granger C. Co-integration and error correction: Representation, estimation and testing. Econometrica. 1987;55(2):251-76.

Pesaran MH, Shin Y. An autoregressive distributed lag modelling approaches to co-integration analysis. In: Strom S, editor. Econometrics and economic theory in the 20th Century: The Ragnar Frisch Centennial Symposium, Cambridge: Cambridge University Press; 1999.

Pesaran MH, Shin Y, Smith R. Bounds testing approach to the analysis of level relationships. Journal of Applied Economics. 2001;16: 289-326.

Johansen S. Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control. 1988;12(2/3):231-54.

Johansen S. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica. 1991;9(6):1,551-80.

Johansen S, Juselius K. Maximum likelihood estimation and inference in cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics. 1990;52(2):169-210.

Odhiambo NM. Supply-leading versus demand-following hypothesis: Empirical evidence from SSA Countries. African Development Review. 2007;19:257-280.

Odhiambo NM. Financial investment-growth nexus in South Africa: An ARDL-bounds testing procedure. Economic Change and Restructuring. 2010;43:205-219.

Olamade OO. Structure, characteristics, and determinants of services export in Nigeria. Journal of Economics and Business. 2018;1(3):299-311.
DOI: 10.31014/aior.1992.01.03.28