Monetary Policy, Credit Cycles, and the Real Economy in Nigeria: A Bayesian DSGE Approach

The interaction between monetary policy, credit cycles, and real economic activity in Nigeria presents a theoretically rich and empirically underexplored problem, given the country's unique combination of a dominant resource sector, a bank-centric financial system, and an evolving monetary policy framework. This study develops and estimates a dynamic stochastic general equilibrium model for the Nigerian economy that incorporates a financial accelerator mechanism, endogenous credit cycles, and a micro-founded monetary policy block. The theoretical contribution is the extension of the Bernanke-Gertler-Gilchrist financial accelerator model to accommodate oil sector-specific capital formation, a dual credit market for formal and informal sector borrowers, and a monetary policy rule estimated from Central Bank of Nigeria data. The model is estimated using Bayesian methods calibrated to Nigerian national accounts, monetary, and financial sector data spanning 2010 to 2023. Impulse response analysis decomposes the contribution of monetary policy shocks versus credit supply shocks to business cycle fluctuations and examines the nonlinear responses of output and inflation during credit expansion and contraction phases. A welfare analysis evaluates the macroeconomic costs of suboptimal monetary policy under imperfect information about the credit cycle state. The theoretical framework integrates new Keynesian macroeconomics, the financial friction literature, and the monetary economics of commodity-exporting economies. The study produces an original estimated dynamic stochastic general equilibrium model for Nigeria, a methodological contribution that distinguishes this research from the reduced-form time-series literature that dominates Nigerian monetary economics. Findings are intended for the Central Bank of Nigeria's Monetary Policy Committee and for academic researchers working on monetary macroeconomics in sub-Saharan Africa. Keywords: monetary policy, credit cycles, DSGE model, Nigeria, financial accelerator