Title: MONETARY POLICY OPERATIONS AND FINANCIAL DEEPENING: A FINANCIAL EDUCATION PERSPECTIVE

Authors: Michael, Saro S., Phd, Thomas, Bariere, Phd and Ikole Dornubari, Phd

Abstract: This study investigates how monetary policy instruments affect financial deepening in Nigeria using annual data from 1995–2024. It examined the extent of the effects of cash reserve ratio (CRR), liquidity ratio (LR), and the monetary policy rate (MPR) on financial deepening (FD), proxied by private sector credit to GDP. Utilizing data obtained from the Central Bank of Nigeria (CBN) statistical bulletin, and employing the vector error correction model (VECM), it was revealed that a stable long run equilibrium in which CRR and LR are positively associated with FD, while persistent increases in MPR reduce FD. The error correction term in the FD equation is negative and significant (−0.143), implying FD corrects about 14.3% of disequilibrium each period. Short run dynamics differ: lagged MPR and LR exert positive short run effects on FD, and Granger causality tests indicate a unidirectional short run causal flow from FD to LR. The study suggests prioritizing and educating on structural reforms that deepen intermediation and using MPR for short term stabilization, while reassessing the calibration of reserve and liquidity requirements within a coordinated macroprudential framework.

Keywords: Monetary Policy, Financial Deepening, Cash Reserve Ratio, Liquidity Ratio, Monetary Policy Rate, Private Sector Credit, Vector Error Correction Model, Granger Causality.

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