Endogenous Growth, Credit Constraints, And Monetary Policy Transmission: A Structural Dynamic Analysis

Abstract

Understanding how monetary policy affects real economic activity through financial markets remains a central issue in macroeconomic policy debates, particularly in emerging economies characterized by shallow financial systems and persistent credit constraints. This study investigates the dynamic interaction between monetary policy, credit markets, and economic growth in Nigeria using annual macroeconomic data covering the period 1990–2024. The analysis employs a Vector Autoregression (VAR) framework to examine the transmission of monetary shocks through interest rates, liquidity conditions, and private sector credit. The empirical results reveal strong macrofinancial linkages. Credit markets display substantial persistence, while increases in real interest rates significantly reduce private sector credit, indicating the presence of borrowing constraints consistent with the financial accelerator mechanism. In contrast, expansions in broad money supply increase credit availability, supporting the bank lending channel of monetary policy transmission. Inflation dynamics respond strongly to credit and interest rate movements, suggesting that financial conditions play a central role in price adjustments. However, economic growth reacts gradually, implying that monetary policy influences output primarily through indirect credit-market channels rather than immediate output responses. The findings highlight the importance of strengthening financial intermediation and credit allocation mechanisms to improve monetary policy effectiveness and support sustainable long-run growth in emerging economies.