Asymmetric Monetary Policy Transmission and Financial Frictions in Nigeria

Monetary policy transmission is characterised by well-documented asymmetries whereby contractionary policy generates larger output responses than expansionary policy, credit conditions respond differently in boom versus recession phases, and small firms experience larger financing frictions than large firms following policy tightening. This study develops a theoretical model of asymmetric monetary policy transmission that incorporates financial frictions and tests it empirically using Nigerian data. The theoretical contribution is a non-linear dynamic stochastic general equilibrium model with credit market imperfections, collateral constraints, and a heterogeneous banking sector that generates state-dependent monetary transmission coefficients as equilibrium outcomes. The model produces original analytical results on the conditions under which asymmetry is amplified by the degree of financial development, the proportion of bank-dependent firms, and the severity of collateral constraints in the economy. The empirical application uses a panel of commercial bank balance sheets from the Central Bank of Nigeria, state-level credit data, and national income accounts for the period 2008 to 2023. Nonlinear autoregressive distributed lag models, Markov-switching vector autoregressions, and panel local projections with state-dependent impulse responses are employed. The study examines whether the 2015 to 2016 and 2022 to 2023 monetary tightening episodes in Nigeria generated asymmetrically larger output and credit contractions relative to periods of policy easing of equivalent magnitude. The theoretical framework integrates the financial accelerator theory, the credit channel of monetary policy, and the non-linear dynamics literature. The PhD-level contribution lies in the theoretical model with endogenous asymmetry, the integration of multiple empirical methodologies for robustness, and the application to Nigeria's specific financial structure. Findings carry major implications for the Central Bank of Nigeria's Monetary Policy Committee and for academic research on monetary transmission in bank-dominated frontier markets. Keywords: monetary policy transmission, asymmetry, financial frictions, Nigeria, non-linear dynamics