Unmasking the Impacts of Monetary Policy Rate, Reserve Requirements, Open Market Operations, and Liquidity Ratio on Financial Stability in the Nigerian Banking Sector (Financial Economics Letters)

Summary

• The study examines monetary policy instruments and banking-sector stability in Nigeria over 1992–2024 using an ARDL framework and the banking-sector Z-score.p.1
• The lagged Z-score is positive and significant in Models 1, 2 and 4, with estimates of 0.621 (p = 0.002), 0.587 (p = 0.004) and 0.595 (p = 0.003).p.18
• The exchange rate is negatively associated with stability and statistically significant at the 5% level in Models 1 and 4.p.19
• Error correction coefficients indicate that approximately 38.4% to 51.2% of the preceding period's disequilibrium is corrected within each period.p.20
• The Z-score has a mean of 2.819 and a standard deviation of 0.538.p.15

Key insights

1. Four separate ARDL models were estimated, one for each of MPR, CRR, OMO and LRA, so interactions among instruments are not estimated.p.12
2. Banking-sector stability shows persistence, as the lagged Z-score is positive and significant in Models 1, 2 and 4.p.18
3. Model 4 records the fastest adjustment rate and Model 3 the slowest.p.20
4. Diagnostic tests found no significant evidence against normal residuals, no serial correlation, correct functional form and homoscedasticity at the 5% level.p.19
5. Jarque–Bera probabilities of the diagnostic tests range from 0.500 to 0.540.p.19
6. The cash reserve ratio does not show a statistically significant short-run relationship in its model.p.21
7. Model 1 records the highest F-statistic, followed by Models 4, 2 and 3.p.22
8. Results are best read as dynamic conditional associations rather than definitive causal effects.p.23
9. In the short run only select instruments, primarily OMO and money supply, exert statistically significant effects.p.24