Effectiveness of Monetary Policy Instruments on Bank Liquidity Management

Abstract

Recognising the importance of monetary and price stability for sustainable growth, many countries’ Central Banks often set certain liquidity targets to be achieved using various monetary policy instruments. This study fills the gap in the literature by employing the ARDL Bounds test to examine the relative effectiveness of a combination of quantity- and price-based policy instruments used by the Central Bank of Nigeria to regulate the level of bank liquidity. Also, the likelihood ratio test is used to determine whether monetary policy instruments work better as a complement (or substitute) concerning liquidity management. Using quarterly data covering 2008/Q1-2020/Q2, we found that, price-based instruments mostly impact liquidity levels in the short- and long-run. The quantity-based instrument shows a significant impact at second lag. However, the impacts of some policy instruments were inconsistent which is partly due to their low usage as short-run measures. We found all the six monetary instruments considered in this study to be complementary for liquidity management. By implication, the combination of monetary instruments for liquidity management is in order. While MPR remains crucial in determining liquidity, a continuous review of its operationality to identify and reduce possible distortions will be beneficial. Also, there is a need for CBN to reassess the disbursement of interventions and their implications on liquidity.