MONETARY POLICY TRANSMISSION TO THE ENERGY SECTOR IN NIGERIA: A COMPARATIVE ARDL INVESTIGATION OF RENEWABLE AND NON-RENEWABLE SOURCES

Abstract

Nigeria faces an energy paradox characterised by a heavy reliance on unsustainable traditional biomass and the growing consumption of fossil fuels, despite the global push for a clean energy transition. The role of monetary policy in shaping this trajectory remains inconclusive, as the extant literature lacks a comparative analysis of its effects on both fossil and renewable energy consumption. This study therefore investigates the short- and long-run effects of monetary policy instruments (the monetary policy rate, liquidity ratio, and broad money supply) on renewable and fossil fuel energy consumption in Nigeria from 1990 to 2022. Using the Autoregressive Distributed Lag (ARDL) bounds testing approach, the findings reveal that a contractionary monetary policy stance, characterised by an increase in interest rates, negatively affects renewable energy consumption but increases fossil fuel consumption in the short run. In the long run, the liquidity ratio significantly sustains dependence on fossil fuels without promoting growth in renewable energy. The study concludes that conventional monetary policy is ineffective for promoting sustainable energy in Nigeria and recommends the implementation of targeted green financing instruments, such as differentiated cash reserve requirements for banks’ lending to renewable projects and coordinated macroeconomic policies to de-risk investments in the energy sector.