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Excess Liquidity and the Effectiveness of Monetary Policy

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  • Magnus Saxegaard
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    Abstract

    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.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/115.

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    Length: 52
    Date of creation: 01 May 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/115

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    Related research

    Keywords: Excess liquidity; Central African Economic and Monetary Community; Credit; Economic models; monetary policy; reserve requirement; central bank; inflation; reserve requirements; monetary policy transmission mechanism; monetary fund; reserve ratio; banking; bank liquidity; monetary policy implementation; interbank market; money supply; government securities; banking sector; banking system; discount rate; aggregate demand; bank credit; money market; monetary union; bank reserves; reserve ratios; foreign exchange; bank securities; bank lending; banks ? liabilities; rediscount rate; monetary community; contractionary monetary policy; money demand; capital mobility; liquidity ratio; monetary transmission; monetary authorities; bank of central african states; bank lending rate; monetary policy transmission mechanisms; bank assets; issuance of government securities; monetary economics; monetary conditions; banking sectors; monetary expansion; discount rates; banks ? assets; bank issues; outstanding government securities; bank rate; open market operations; expansionary monetary policy; monetary unions; monetary transmission mechanism; monetary aggregate; central bank rate; banking systems; foreign exchange market; bank research; high reserve requirement; market for government securities; liquid asset; monetary aggregates; monetary policy operations; banks ? balance sheets; var model; monetary control; decentralization; monetary policy regime; monetary policy instruments; minimum reserve requirements; bank discount rate; banks ? loan;

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    1. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
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    11. Savvides, Andreas, 1998. "Inflation and monetary policy in selected West and Central African countries," World Development, Elsevier, vol. 26(5), pages 809-827, May.
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    13. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
    14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    15. Baldacci, Emanuele & Hillman, Arye L. & Kojo, Naoko C., 2004. "Growth, governance, and fiscal policy transmission channels in low-income countries," European Journal of Political Economy, Elsevier, vol. 20(3), pages 517-549, September.
    16. Pesaran, H.M. & Potter, S.M., 1995. "A Floor and Ceiling Model of U.S. Output," Cambridge Working Papers in Economics 9407, Faculty of Economics, University of Cambridge.
    17. Adam, Christopher, 1999. "Financial Liberalisation and Currency Demand in Zambia," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(3), pages 268-306, October.
    18. Stéphane Cossé & Johannes Mueller & Jean Le Dem & Jean A. P. Clément, 1996. "Aftermath of the CFA Franc Devaluation," IMF Occasional Papers 138, International Monetary Fund.
    19. Nathan S. Balke, 2000. "Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 344-349, May.
    20. David Fielding, 1994. "Money Demand in Four African Countries," Journal of Economic Studies, Emerald Group Publishing, vol. 21(2), pages 3-37, May.
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