EFFECT OF MONETARY POLICY ON STOCK MARKET LIQUIDITY IN NIGERIA

Abstract

The unpredictable transmission of monetary policy instruments to stock market liquidity in emerging economies, coupled with conflicting empirical evidence and a scarcity of localized African context studies, necessitates a rigorous investigation of how monetary policy affect stock market liquidity in Nigeria. The Specific Objectives are to examine the effect of monetary policy rate on stock market liquidity; to determine the effect of cash reserve ratio on stock market liquidity; and to assess the effect of money supply on stock market liquidity in Nigeria. The study is underpinned with Portfolio Balance Theory and ex post facto research design was utilized. The methods and data sources are secondary method of data collection for the periods of 1990 to 2025 from Central Bank of Nigeria statistical bulletins and Nigerian Exchange Group. Monetary policy is proxied with monetary policy rate, cash reserve ratio and money supply and stock market liquidity proxied by stock turnover ratio. Vector Error Correction Model was utilized as the data analysis technique. The study found that monetary policy rate has a significant positive long-run effect on liquidity but no short-run effect; cash reserve ratio shows no significant effect in either long or short run; money supply exhibits marginally significant positive long-run effect only. The error correction term indicates rapid equilibrium adjustment of 62% annually. The study concludes that monetary policy transmission operates primarily through long-run adjustment channels, with monetary policy rate being the most influential instrument. The study recommends that Central Bank of Nigeria should carefully calibrate monetary policy rate adjustments, reconsider reliance on cash reserve ratio for liquidity management, and pursue complementary market infrastructure improvements rather than sole dependence on money supply expansion.