Impact of liquidity level on effectiveness of the monetary policy transmission of Bank Al Maghrib

In the context of international financial crisis, this paper aims to analyze the impact of liquidity level on effectiveness of monetary policy transmission of the Moroccan central bank (Bank Al Maghrib, BAM). After a long period of liquidity excess, the Moroccan banking system through, since 2007, a liquidity shortage that forces BAM to inject a regular and massive quantity of liquidity. For example, 7-day advances bidding BAM rose from 3,5 billion dirhams in 2006 to 2,420 billion dirhams in 2012, an increase by 691 times. To evaluate the influence of liquidity level on effectiveness of the monetary policy transmission of Bank Al Maghrib, we estimate a simple VAR over the period 1998-2012 by distinguishing the period of liquidity excess and liquidity shortage.Our results show that in periods of liquidity excess the monetary policy transmission would be less effective, especially in the long term. Instead, a situation of liquidity shortage makes it more effective.