Moderating Effect of Monetary Policy Rate on Financial Deepening-Capital Market Development Nexus in Nigeria

Financial deepening as an aspect of financial development is expected to stimulate the growth of financial assets relative to the size of the economy and in turn facilitate capital market development. However, opportunity cost of money (in the form of monetary policy rate) could affect the effectiveness of financial deepening in stimulating capital market development in Nigeria. Therefore, this study investigated whether monetary policy rate enhances or reduces the effect of financial deepening on capital market development in Nigeria from 1981 to 2023. Annual time series data obtained from Central Bank of Nigeria’s Statistical Bulletin were analysed using Autoregressive Distributed Lag (ARDL) regression technique. While capital market development was measured as market capitalization ratio (ratio of capital market capitalization to gross domestic product), this study also measured financial deepening using monetization ratio (money supply/gross domestic product ratio) and credit to private sector/gross domestic product ratio. The study found that monetary policy rate reduces the negative effect of credit to private sector/gross domestic product ratio on market capitalization ratio in both short- and long-run in Nigeria. However, when examined using the monetization ratio, monetary policy rate hampers the positive effect of financial deepening on market capitalisation ratio in Nigeria in both long-run and short-run. The study therefore concludes that monetary policy rate significantly moderates the financial deepening-capital market development nexus in Nigeria. Therefore, there is the need for the Central Bank of Nigeria to use the tool of monetary policy rate with caution by taking cognizance of its significant role in the economics of capital market development in Nigeria.