Cross-Border Transmission of Interest Rate Shocks: A VAR Analysis of the Nigerian Economy

Abstract

This paper examined if interest rate shocks from the U.S are transmitted to Nigeria. For this purpose, we collected data on four Nigerian variables (real GDP, CPI, exchange rate and interest rate) and two foreign variables (U.S FFR and the world CPI) for the period 1983-2011. The impulse response analysis of our VAR model shows that Nigerian variables respond insignificantly to shocks from foreign variables. We therefore concluded that shocks in Nigeria are basically home-made.  We recommended that monetary authorities in Nigeria should base their policy making on domestic shocks, as considering external factors might mislead them.

Keywords: Interest rate shock, International transmission, Nigeria, U.S.A., VAR.