SHORT-RUN MACROECONOMIC EFFECTS OF BANK LENDING RATES IN NIGERIA, 1987-91: A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS
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Date
1995-03
Authors
AJAKAIYE, D. OLU
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
In this study, a computable general equilibrium (CGE) model was developed for Nigeria
and applied in simulating the short-run macroeconomic effects of the rising bank lending rates experienced during the period of financial liberalization, i.e., 1987-1991,
incorporating the confounding effects of the exchange rate depreciation that also occurred during this period. In order to assess the severity of the effects of the rising bank lending rates, the model was simulated while controlling for the exchange rate effects. Analysis of the results shows that the rising bank lending rate along with the exchange rate depreciation had deleterious effects on inflation, output, income, consumer demand and government fiscal posture. It was also found that while the rising bank lending rate without the confounding effects of exchange rate depreciation had deleterious effects on these macroeconomic aggregates, the effects were less severe. Thus, the exchange rate depreciation only aggravated the adverse effects of the bank lending rate during this period.
These findings provide a reasonable basis for suggesting that the monetary authorities
should fix the spread between the maximum lending rate and the interest rate on savings deposits at the 3.5% rate that prevailed at the beginning of the financial sector
liberalization in 1987. The minimum rediscount rate (MRR) should also be reduced to
its 1987 level of 12.8% in order to induce the banks to lower interest rates generally.
Moreover, the role of banks in foreign exchange management should be limited to that
of intermediation between the Central Bank of Nigeria (CBN) and the end-users. The
end-users would then bid directly in the foreign exchange market, a situation that should
enhance the potency of appropriate monetary and fiscal policies as instruments for
stabilizing the exchange rate of the naira.
Description
HG 1642 .N6 A37 1995
Keywords
Bank loans - Nigeria - Econometric Models , Interest Rates- Nigeria - Econometric Models , Monetary Policy - Nigeria- Econometric models , Computable general equilibrium models , Nigeria - Economic conditions 1970 - Econometric Models