The Mediating Role of Aggregate Investment in Monetary Policy Transmission to Economic Growth in Nigeria

This study examines the role of aggregate investment in transmitting the effects of monetary policy to economic growth in Nigeria. Motivated by persistent weaknesses in monetary policy effectiveness in developing economies, the study explicitly models private and public investment as mediating channels linking monetary policy instruments to output growth. Using annual data spanning 1986–2024 and employing an Autoregressive Distributed Lag (ARDL)–Error Correction framework within the Baron and Kenny mediation approach, the study estimates the direct, indirect, and total effects of monetary policy on economic growth. The results reveal that monetary policy does not exert a robust direct effect on economic growth once investment is incorporated into the growth equation. Instead, monetary policy influences growth predominantly through aggregate investment, confirming the presence of indirect transmission. Private investment emerges as an effective and growth-enhancing channel, exhibiting a positive and significant short-run impact on economic growth. In contrast, public investment displays a negative short-run effect, reflecting structural inefficiencies, implementation lags, and weak complementarities with private sector activity. Among monetary policy instruments, money supply significantly shapes both private and public investment, while reserve requirements and exchange rate dynamics exert contractionary or weak effects depending on the horizon. These findings underscore that the effectiveness of monetary policy in Nigeria depends less on the stance of policy instruments and more on the quality and productivity of investment transmission. By explicitly integrating aggregate investment into the monetary policy–growth nexus, the study contributes novel, context-specific evidence for Sub-Saharan Africa and highlights the need for policy coordination that prioritizes private sector investment, financial intermediation efficiency, and institutional reforms to enhance growth outcomes.