MONETARY-FISCAL INTERACTIONS AND THE STABILITY OF MONEY MARKET INSTRUMENTS IN NIGERIA: ASSESSING NIGERIA’S MONEY MARKET AND POLICY TRANSMISSION

Research Problem: Despite the central role of money markets in monetary policy transmission, limited empirical research has examined how different money market instruments interact with key monetary and fiscal variables in Nigeria. Persistent macroeconomic instability, fluctuating interest rates, and inconsistent policy alignment have raised concerns about the efficiency of the money market in supporting monetary policy objectives. Understanding these dynamics is essential for strengthening financial stability and policy effectiveness. Methods/Theory: This study adopts cointegration analysis and the Vector Error Correction Model (VECM) to investigate the short- and long-run relationships between money market instruments and monetary policy indicators. Four key instruments—Treasury bills, Treasury certificates, certificates of deposit, and bankers’ acceptances—were regressed against interest rates and money supply, with economic growth and fiscal policy included as control variables. Unit root and Johansen cointegration tests established the integration properties of the variables and confirmed the presence of at least two long-run equilibria. Results: The VECM findings reveal that interest rates exert a significant negative effect on money market activity, indicating contractionary implications for instrument performance. By contrast, money supply and economic growth have positive and significant impacts, demonstrating their roles in enhancing money market depth. Fiscal policy shows a weak but negative effect, suggesting potential crowding-out tendencies. The error correction term is significant, confirming a meaningful speed of adjustment toward equilibrium and signalling resilience within Nigeria’s financial system. Diagnostic tests validate the stability and robustness of the estimated model. Conclusion: Money market performance in Nigeria is shaped by the interplay of monetary and fiscal variables, with interest rate movements and liquidity conditions exerting the strongest influence. Effective coordination between monetary and fiscal authorities is crucial for enhancing the efficiency of the money market as a transmission channel. Key Contribution to Knowledge: This study enriches monetary economics literature by providing comprehensive empirical evidence on the joint effects of interest rates, money supply, fiscal policy, and growth on key money market instruments in Nigeria over more than three decades. Recommendation: The study recommends aligning monetary and fiscal policies to reduce crowding-out pressures, ensuring interest rate stability, and strengthening money market instruments to enhance their effectiveness in monetary policy transmission. Further research should explore instrument-specific behavioural dynamics and incorporate structural breaks to capture evolving financial reforms.