Benue State University, Makurdi

THE PRIMARY LINK IN THE KEYNESIAN TRANSMISSION MECHANISM IN NIGERIA: AN EMPIRICAL INVESTIGATION.

Andohol Jerome Ph.D

Abstract

Keynesians theoretical postulations have availed that interest rate which is the primary channel in the Transmission mechanism of Money supply on the stability of prices in the economy has been immersed in economic discourse. This relationship which is indirect and negative has been the discourse amongst economist and it is inconclusive. This study seeks to complement literature in this area given evidence for Nigeria between 1975-2011. The use of Vector Error Correction Model (VECM) within the framework of Vector Auto Regression (VAR) methodology was adopted for analysis. Variables such as Inflationary Rate (INF), Total Liquidity of Money(M 2 ) proxied as total quantity of money supplied(MS), the Minimum Rediscount Rate(MRR) proxied as interest Rate, where sourced from Central Bank of Nigeria Bulletin and used as data set for analysis. The study revealed a negative and unidirectional long- run equilibrium relationship between interest rate and money supply, with the interest rate serving as the signal to variations in money supply. It was also noted that money supply is not a major determinant of interest rate as substantiated by the insignificant values of the t-statistics and the low R 2 value of 37% variations explained by the model specified and 63% variations not captured by the model. Worthy to note also is that the short run relationship between money supply and interest Rate alternated between negative and positive relationships. Reasons for such behaivour reveal the combination of the Keynesian -effect and the expectation factor effect. Against this background, it is recommended that government should apply caution in the use of these two important tools of monetary policy to achieve price stability, as well as the need to consider other factors to augment the efficacy of the use of these tools. It is also worthy to note that the continuous use of interest rate as the key driver of the quantum of money to be supplied by monetary authorities, is a signal in the right direction.

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