Application of Taylor Principle to Lending Rate Pass-Through Debate in Nigeria: A Parametric Approach

Abstract

The paper makes clear evidences on the lending rate pass-through from policy to retail interest rates and points out some recent findings on implications for both monetary policy and financial variable flows. Thus the stability properties associated with monetary policy rules have attracted a substantial amount of attention.  Several studies argued that the comparatively successful conduct of monetary policy since the early 1980s is primarily due to the implementation of an appropriate policy rule. The estimation procedures follow the modern econometric methodology, such as, a parametric test which consists of the weighted least square technique, Unit root test and co-integration technique, respectively. Empirical result recommends that the pass-through is incomplete for Nigeria within the period under review, which contradicts the Taylor principle.  As the pass-through is incomplete, policy rates have to respond by even more to compensate for the smoothing of retail rates. Besides, our findings show that an incomplete pass-through has implications for the stabilizing role of monetary policy and the oscillations arising from price and liquidity shocks.

JEL Classification: E43, E51, E52, E58

Keywords: Taylor Principle, Lending Rate Pass-Through, Liquidity Shocks, Weighted Least Square.