Impact of Money Supply and Interest Rate on Financial Stability in Nigeria

This study investigates the impact of money supply and interest rate on financial stability in Nigeria using annual time-series data from 2013 to 2023. Drawing on the Quantity Theory of Money and the Interest Rate Transmission Mechanism, the research adopts an ex-post facto design and employs Ordinary Least Squares (OLS) regression analysis to examine the relationships among the variables. Descriptive statistics and unit root tests were conducted to ensure the reliability and stationarity of the data. The empirical findings reveal that money supply has a statistically significant negative impact on financial stability (p < 0.05), while interest rate exerts no significant effect (p > 0.05). These results suggest that expansionary monetary policies, when not properly managed, can destabilize the financial system, while interest rate policy appears ineffective due to weak transmission mechanisms within Nigeria’s economic structure. The study fills a notable gap in the literature by offering fresh empirical evidence over a recent and extended period, particularly in the context of macroeconomic volatility, policy inconsistency, and structural challenges. Previous studies often addressed monetary variables in isolation or yielded inconclusive results. By analyzing both variables concurrently within the Nigerian context, this research contributes to a more comprehensive understanding of financial system behavior in developing economies. The study recommends improved monetary coordination, institutional reforms, and a deeper financial market structure to enhance policy effectiveness and maintain financial stability