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EFFECT OF MONETARY POLICY ON THE BANKING SYSTEM STABILITY IN NIGERIA
Abstract
The paper examined the effect of monetary policy on banking system stability in Nigeria. The main objective was to evaluate how monetary policy affected the banking system stability during the global financial crisis in Nigeria. Static and dynamic error correction models were estimated using monthly data from January 2007 to June 2013 and the error correction model was found most efficient. The banking system stability index was computed using banking soundness index, banking vulnerability index and economic climate index. The results showed that increase in monetary policy rate, depreciation of nominal exchange rate and rising inflation rate negatively affected the banking system stability. However, similar increase in cash reserve requirement and banking reforms improved the banking system stability. Accordingly, the paper recommended that the CBN should be watchful of increase in MPR, depreciation of the Naira and rising inflation to ensure banking system stability. Also, increase in CRR and financial reforms can positively impact on the banking system stability in Nigeria. Overall, there is need for the Bank to identify appropriate adjustment in its instruments to achieve macroeconomic stability and banking system stability.
Keywords: Monetary Policy, Banking System Stability