Money Market Instruments and Financial Deepening in the Nigeria Emerging Economy

Abstract

The study examined money market instruments and financial deepening in the context of an emerging economy like Nigeria. The study used money market instruments like Treasury bills (TBs), Bankers' acceptances (BAs), Certificate of deposits (CDs) and Commercial papers (CPs). The ratio of money supply to gross domestic product was a proxy for financial deepening. Time series data was generated from Central Bank of Nigeria Statistical Bulletins in the period 1981 to 2016 for the study. Preliminary tests including Augmented Dickey Fuller (ADF), unit root test and descriptive statistics were carried out before the main econometric procedures were employed to analyze the data. The econometric procedures carried out include granger causality test, the ordinary least square multivariate regression method; the Johansen co-integration and the error correction mechanism methods (ECM). The study found strong effect of money market instruments on financial deepening in Nigeria in the long run. Granger causality test result revealed no directional causality relationship between Treasury bills and financial deepening, while bi-directional causality exists between Certificate of deposits and financial deepening; unidirectional causality exists between Bankers' acceptances, Commercial papers and financial deepening. The study recommends that policies that promote trading in international money market instruments like Bankers' acceptances should be strengthened by the Federal government of Nigeria to deepen the financial market as well as enhance the competitiveness of the Nigerian money market in the global market. This should consequently translate to financial deepening in Nigeria and improvement of the economy at large.