IIARD International Institute of Academic Research and Development

IIARD INTERNATIONAL JOURNAL OF BANKING AND FINANCE RESEARCH (IJBFR )

E-ISSN 2695-1886
P-ISSN 2672-4979
VOL. 4 NO. 2 2018

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Does Central Bank Reserve Requirements Granger-Cause Economic Development?

Richard Osadume, FCA, PhD and Vitalis Obialom

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Abstract

This Study examined the Effect of Central Bank Reserve Requirement Policies on Economic Development of Nigeria (1986-2016). The objective of this study was to determine if the Central bank Reserve requirements represented by liquidity and cash reserve ratios, Granger-caused economic development. The monetarist theory, on which this work was anchored believe that Changes in monetary policy rates should result to direct and proportionate change in Economic Development of a country but some available findings from studies appear to disagree with this proposition. The study used secondary data sourced from World Bank, UNDP, Bureau of Statistics and the Central Bank of Nigeria; The research work selected Nigeria as its sample and used the OLS, Co-integration, Granger-causality and Error Correction model data Analysis techniques, to test the Effect of the independent variables (Cash reserves ratio, and Liquidity ratio) on the dependent variable, economic development (proxy by Human Development index) and tested at the 5% level of significance. The findings showed that reserve requirements captured by cash reserve and liquidity ratios, both showed positive, but insignificant, and significant effect respectively on economic development in the short-run period. Furthermore, all the tested variables showed positive and significant effects in the long-run period on economic development with significant speed of adjustments. The study concludes that the Central Bank reserve requirements does not Granger-cause economic development in the short –run but have positive and significant effect on economic development in the long run, and recommends amongst others that monetary authorities should allow ample time for cash reserve and liquidity ratios policies to achieve their target objective and avoid short term policy somersaults. Also, that such policies should be undertaken with caution not to stifle business and economic development activities while in opera

keywords:

Central Bank, reserve requirements, cash reserve ratio, liquidity ratio, Human development index, inflation rate.

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