Financial Market Development and Inflation Rate in Nigeria

Abstract

This study examines the effect of financial market development on inflation rate in Nigeria over the period 1981–2024. Financial market development was proxied by market capitalization, clearing cheques, total savings, and net financial inflows, while inflation rate served as the dependent variable. The study adopted an ex-post facto research design and employed the Autoregressive Distributed Lag (ARDL) model to analyze both short-run and long-run dynamics. Preliminary tests, including unit root and bounds cointegration tests, were conducted to ensure the suitability of the estimation technique. The findings reveal that financial market development has a significant effect on inflation in Nigeria, although the impact varies across indicators. In the short run, market capitalization exhibits a negative and significant effect on inflation, while clearing cheques, total savings, interest rate, and net financial inflows show positive but insignificant effects. In the long run, market capitalization remains negatively significant, whereas interest rate exerts a positive and significant influence on inflation. However, the bounds test indicates the absence of a long-run equilibrium relationship among the variables. The study concludes that financial market development plays a critical role in shaping inflation dynamics in Nigeria, though its effectiveness depends on the structure and consistency of macroeconomic policies. The study recommended that policymakers strengthen capital market development and ensure policy coordination, particularly between monetary authorities and financial regulators, to achieve price stability and sustainable economic performance.