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Title: Issues in reserve requirement and monetary management in Nigeria
Authors: Otu, Moses F.
Tule, Moses K.
Keywords: Reserve requirement
Financial system innovations
Deposit money banks
Monetary policy
Monetary management
Exchange rate regimes
Inter-Bank Foreign Exchange Market (IFEM)
Liquidity Overhang
Autonomous Foreign Exchange Market (AFEM)
Fiscal Dominance
Issue Date: Sep-2002
Publisher: Central Bank of Nigeria, Research Department.
Citation: Otu, M. F. & Tule, M. K. (2002). Issues in reserve requirement and monetary management in Nigeria, Economic and Financial Review (EFR), 40(3), 35-51.
Series/Report no.: Vol. 40;No. 3
Abstract: Reserve requirement has been used over the years as a tool of monetary management. Accordingly, banks are required by law to hold a fraction of their deposit liabilities with the Central Bank as reserves. In recent times however, the use of reserve requirement has undergone modification, from drastic reductions to outright elimination. This is attributed to the perception that under rapidly changing structure and financial system innovations, reserve requirement is a weak tool of monetary management. This paper reviews these issues and examines the effects of required reserve on the balance sheet operations of Deposit Money Banks and its impact on the monetary aggregates in Nigeria. It revealed that reserve requirement has significant cost implications on both the Central Bank and the Deposit Money Banks, and that its potency as a tool of monetary management has been weakened as the targeted reserve does not reflect the total reserve level in the system. The paper recommends a drastic reduction of reserve requirement and fine-tuning to accommodate the interest of smaller banks.
Description: Both authors were principal and senior economists in the Research Department, Central Bank of Nigeria at the time of publication of this article.
ISSN: 1957-2968
Appears in Collections:Economic and Financial Review

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