The impact of Central Bank’s Credits to the Federal Government on the Effectiveness of Open Market Operations in Nigeria

Abstract

This paper investigates the impact of the Central Bank's credit to the Federal Government on the effectiveness of open market operations (OMOs) as a tool of monetary policy in Nigeria from 1993Q1-2021Q4. The monetary instability in Nigeria is a result of the ineffective use of market-based monetary policy instruments which have worsened liquidity conditions and sparked inflationary pressures in the economy. The study used the ARCH/GARCH method in order to analyse the quarterly secondary data collected from the Central Bank of Nigeria and the National Bureau of Statistics. The findings of the study showed fiscal deficits rise or fall as the Central Bank's credit to the Government rises or falls. Also, CBN credits to the Federal Government had a significant negative impact on the effectiveness of OMO sales in Nigeria. The ARCH and GARCH terms in OMOs implied that volatility is persistent in the open market for treasury bills in Nigeria. Furthermore, the OMO sales forecasts showed that the conditional variance of the model converges to a steady quickly stated thereby implying that OMOs are effective. The study concludes that OMOs if more efficiently utilised, could stabilise monetary aggregates and stabilise prices in the economy.