Remittances, financial development and the effectiveness of monetary policy transmission mechanism in Nigeria: a DSGE approach (1986–2018)

• Published in: Indian economic review 2021, Vol.56 (1), p.91-112
• Main Author: Apanisile, Olumuyiwa Tolulope
• Format: Article
• Language: English
• Subjects: Econometrics; Economic Policy; Economics; Economics and Finance
• ISSN: 0019-4670; 2520-1778
• DOI: 10.1007/s41775-021-00110-z

The study examines the effect of remittance inflows on the effectiveness of monetary policy transmission channels in Nigeria using the New-Keynesian DSGE model. The study employs quarterly data spanning from 1986:1 to 2018:4. Four different channels are considered namely interest rate, exchange rate, credit and expectation channels. Results show that remittance inflows hinder the effectiveness of monetary policy channels. This implies the bulk of remittance inflows into the country do not pass through the financial system. Rather, the inflow is through the informal channels thereby making it difficult for the monetary authority to control the amount of inflow. Furthermore, given the impact of remittance on output gap, it shows that remittance has low persistence in the economy despite the inflow. This implies the bulk of remittance inflow is spent on consumption and not investment. Considering the effect of remittance inflow on inflation, the inflow is not inflationary. The study concludes that to better sterilize the effect of remittance inflow in the country, monetary policy authority should encourage the inflow through the financial system.