The Impact of Nigeria's Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR) on Stock Market Liquidity

Abstract

This study examines the impact of Nigeria's Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR) on stock market liquidity from 2010 to 2024, a period marked by significant monetary policy tightening aimed at tackling high inflation and exchange rate volatility. Using an Autoregressive Distributed Lag (ARDL) model with quarterly data, the research explores the relationship between these monetary policy tools and trading volume, a key indicator of stock market liquidity, while controlling for GDP growth. The findings reveal a complex dynamic: the MPR shows a statistically significant positive effect on liquidity (p = 0.049), indicating that investors tend to shift toward equities for higher returns during monetary tightening, while the CRR has no statistically significant short-term impact (p = 0.083), suggesting weak policy transmission in Nigeria’s financial system. Notably, GDP growth proves to be the most influential factor for liquidity (p = 0.004), emphasizing the dominant role of macroeconomic conditions over monetary policy. These results challenge traditional theoretical expectations, such as liquidity preference and reserve requirement theories, by highlighting unique market behaviors in Nigeria’s highinflation setting, where investors frequently engage in speculation or hedging. The study calls for coordinated policy reforms, including improved communication strategies by the Central Bank of Nigeria and measures to enhance financial market infrastructure, to make monetary policy more effective. Specifically, this study recommends that the CBN adopt a balanced approach by implementing structural reforms, such as financial inclusion initiatives and exchange rate stabilization, to complement changes in the MPR and CRR. These insights provide valuable guidance for policymakers, investors, and scholars managing Nigeria’s volatile economic environment.