The Role of the Central Bank and Monetary Policy in Promoting Financial Stability

This study investigates the role of central banks and monetary policy in promoting financial stability. It reflects on the extent to which conventional and unconventional monetary policy instruments are employed by the Central Bank to sustain macro-financial stability, curtail systemic risks, and contribute to sustainable economic growth. In addition, this study utilises a mixed-method approach comprising systematic review of literature, case study analysis, and semi-structured interviews with experts from the monetary and financial sectors for a more comprehensive approach to investigating the design, implementation, and impact of the monetary policy. The study establishes that the central banks hold a very significant role in ensuring the stability of the financial system, engaging in interest rate adjustment, cash reserve ratio (CRR) adjustments, open market operation (OMO), and macroprudential policies. The case studies discussed showcase the response of the Central Bank of Nigeria to the COVID-19 pandemic and the 2024 inflation shock and demonstrate the critical application of monetary instruments in liquidity management, inflation control, exchange rate stabilisation, and sustenance of financial stability. Moreover, the study contends that hindrances to the greater effectiveness of monetary policy in Nigeria include, but are not limited to, structural weaknesses in the economy, currency fluctuations, limited channels for the transmission of policy changes, and absence of effective monetary-fiscal coordination. In response to these concerns, the study suggests bolstering macroprudential frameworks, enhancing the coordination of monetary and fiscal policies, improving policy communication and transparency, deepening financial markets, using data-driven policy tools, and maintaining central bank independence to keep up with the rising complication of the financial system and the rest of the economy.

Central Bank, Financial Stability, Monetary Policy, Nigeria, Financial Accelerator Theory, Liquidity Management, Macroprudential Policy.

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