Determinants of Excess Liquidity: The Nigerian Experience

Prince C. Nwakanma, Ifeanyi Mgbataogu M. Sc


Containing excess liquidity is the concern of most central banks including the Central Bank of Nigeria (CBN); this study is an attempt to ascertain the factors that account for the persistence of excess liquidity in Nigerian economy. The Vector Autoregressive (VAR) and Granger Causality tests are utilized for the study. The results are further supplemented with Impulse Response and Variance Decomposition tests. The empirical results reveal that among all the variables included in the study, level of money supply, foreign exchange monetisation, and lagged excess liquidity are the major determinants of excess liquidity in the Nigerian. The findings therefore buttress the fact that Nigerian economy as an open economy is susceptible to the dynamics of foreign economies especially the developed economies of United States as larger part of the foreign reserve is domiciled in US Dollar. Hence, the need for efficient management of foreign exchange is advocated as imperative for curbing excess liquidity. Again, we recommend effective, efficient and timely combination of monetary policy instruments to help control money supply as monetary policy rate alone cannot effectively control money supply in Nigerian economy.

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International Business Research  ISSN 1913-9004 (Print), ISSN 1913-9012 (Online)

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