Central banks are general known to be concerned with the maintenance of monetary stability. This task involves the regulation of money in circulation consistent with the absorphic capacity of the economy axiomatically, excessive growth in money supply rates to high rates of spending on domestic or foreign goods given that domestic supply of goods and services in essentially in elastic in the short run, excess liquidity is likely to result in substantial inflationary is likely to result in substantial inflationary pressures in the economy. To the extent that spending pressures are directed towards foreign goods or (assets0 balance of payment pressures will ensure. Thus, the task of monetary authorities is to ensure that the growth in the domestic liquidity is consistent with the objectives of out-put growth, inflation and the balance of payments. This at any given time the CBN would ensure that supply of money is sufficiently optimal to sustain non-inflationary out-put rate and exchange rate stability.
One of the strategies of achieving this objectives is through the adoption of the liquidity management policies / techniques which afford the CBN, the use of monetary policy instrument to influence bank reserve and consequently the growth in money supply. The ability of the central bank to effectively control domestic liquidity depends interaction the level of the economic development particularly the state of its financial system the number and types of policy instruments available to the central banks and degree of harmonization between monetary and fiscal policies