Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa

May 1, 2006

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Format: Chicago

Magnus Saxegaard. Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa, (USA: International Monetary Fund, 2006) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the pattern of excess liquidity in sub-Saharan Africa and its consequences for the effectiveness of monetary policy. The paper argues that understanding the consequences of excess liquidity requires quantifying the extent to which commercial bank holdings of excess liquidity exceed levels required for precautionary purposes. It proposes a methodology for measuring this quantity and uses it to estimate a nonlinear structural VAR model for the CEMAC region, Nigeria and Uganda. The study suggests that excess liquidity weakens the monetary policy transmission mechanism and thus the ability of monetary authorities to influence demand conditions in the economy.

Subject: Banking, Commercial banks, Excess liquidity, Monetary transmission mechanism, Reserve requirements

Keywords: Contractionary monetary policy, Nominal exchange rate, Transmission mechanism, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/115
Stock No:

WPIEA2006115
ISBN:

9781451863758
ISSN:

1018-5941

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