Asymmetric Effects of Monetary Policy and Exchange Rate on Commercial Bank Profitability in Nigeria: Evidence from a Nonlinear ARDL Approach

Abstract

This study explores the asymmetric effects of monetary policy and exchange rate movements on the profitability of Nigerian deposit money banks from 2008 to 2024. To account for potential differences between positive and negative changes in monetary policy and exchange rate, the study employs the nonlinear panel ARDL (NARDL) technique. The results reveal that positive and negative changes in MPR have significant negative long-run effects on bank profitability. However, the Wald test reveals that these effects are statistically similar; this shows that MPR has a symmetric long-run effect on bank profitability. On the other hand, exchange rate movements reveal significant long-run asymmetry, with positive and negative changes producing statistically different effects on bank profitability. The study suggests that monetary policy has a symmetric effect on the profitability of Nigerian banks, while exchange rate movements have asymmetric long-run effects, with increases and decreases in the exchange rate affecting bank profitability differently. The study therefore recommends that monetary and banking sector authorities consider the asymmetric and persistent effects of exchange rate movements when designing policies aimed at enhancing bank profitability and financial stability.