Effect of Money Market Liquidity and Interest Rates on Economic Growth of Nigeria

Abstract

Despite the critical role of the money market in mobilising short-term funds and stabilising the financial system, Nigeria’s economic growth trajectory has remained volatile and inconsistent. Therefore, this study examined the effect of money market liquidity and interest rates on economic growth in Nigeria over the period of thirty-three years from 1981–2023. The study used real gross domestic product as the proxy for growth. Liquidity was measured as broad money supply minus currency outside banks divided by broad money supply, while the interest rate was measured as the face value minus purchase price divided by purchase price multiplied by 365 divided by days to maturity multiplied by 100%. The study utilised a longitudinal research design. The Discrete Threshold Regression technique was employed to uncover nonlinear relationships that conventional linear models often overlook. The results revealed that money market liquidity exerted a positive and significant effect on economic growth, with disproportionately larger impacts at lower levels of liquidity and sustained but moderate effects as liquidity deepened. Meanwhile, money market interest rates have a negative and significant effect on economic growth, as high rates discouraged borrowing and reduced credit availability for investment and consumption. These findings indicated that Nigeria’s economic growth trajectory was more liquidity-driven than interest-rate dependent, underscoring the importance of financial market development in stimulating productive activities. The study concluded that deepening liquidity while maintaining interest rates at growth-friendly levels was crucial for strengthening financial intermediation and promoting sustainable economic expansion. The study recommended that the government should have deliberate reforms to enhance money market depth, ensure efficient credit allocation and stabilise interest rates, which could serve as a viable strategy for accelerating Nigeria’s long-term economic growth.