ABSTRACT

This study investigated the effect of monetary policy on bank liquidity in Nigeria. Specifically, the study investigated firstly the effect of open market operation on bank liquidity in Nigeria. Secondly, the effect of monetary policy rate on bank liquidity in Nigeria. Thirdly, the influence of cash reserve ratio on bank liquidity in Nigeria. Lastly, the influence of loan to deposit ratio on bank liquidity in Nigeria The study was based on theories such as shiftability theory, anticipated income theory, and commercial loan theory. Time series data of 30 years (1986-2015) was used. The ordinary least square (OLS) method was used to statistically investigate the effect of monetary policy on bank liquidity. In employing the ordinary least square method, four functional models, that is, linear, semi-log, double log, and Exponential models were used. The result of the best regression estimate (linear model) indicated that monetary policy has significant effect on bank liquidity in Nigeria. On the specific, the estimate indicated that open market operation has negative and significant effect on bank liquidity in Nigeria. In addition, the result shows that monetary policy has negative but insignificant effect on bank liquidity in Nigeria. Moreover, there was evidence that cash reserve ratio has positive and significant influence on bank liquidity in Nigeria. Lastly, loan to deposit ratio has negative and significant influence on bank liquidity in Nigeria. The study recommended that the monetary authority design a workable plan for effective and efficient utilization of open market operations. This will improve the level of saving and investment in the economy, thereby enhancing the level of bank liquidity. It equally recommended that a strategic long-term plan, implementation process, and constant evaluation mechanism be design to monitor the effect of monetary policy rate on principle economic variables such as bank liquidity. This will help to reduce the negative effect of monetary policy on bank liquidity and help the monetary authority to avoid quick response approach mostly used to maintain bank liquidity in the country.