Domestic Monetary Policy and Foreign Direct Investment in Nigeria: Examining the Dynamic Effects of Money Supply and Interest Rate

Monetary policy has historically shaped foreign direct investment inflows and economic outcomes. This study analysed the correlation between two core monetary policy factors, money supply and interest rate and Foreign Direct Investment (FDI) inflows in Nigeria over 34 years (1990 2023), employing the Autoregressive Distributed Lag (ARDL) bounds testing methodology. Descriptive statistics indicate significant fluctuation in essential variables: Foreign FDI inflows averaged USD 3,245 million (CV = 0.664), while money supply increased from ₦68.66 billion to ₦78.74 trillion. Interest rates averaged 14.2% (CV = 0.338). Initial assessments indicate that FDI, money supply, and gross domestic product (GDP) are integrated of order one I(1), while the interest rate is stationary I(0). The ARDL limits test (F statistic = 4.87) surpasses the upper critical value (4.85 at 5% significance), affirming a stable long run equilibrium relationship. The estimated ARDL (1,0,0,1,0) model exhibits strong explanatory capability (R² = 0.786, Adjusted R² = 0.701, F statistic = 9.25). Money supply increase exerts a positive effect on FDI (β = 0.154, p = 0.054), indicating that a 1% rise in lagged money supply enhances FDI by 15.4%, signifying improved liquidity circumstances. Interest rates exhibit statistically minor impacts on FDI in both the short run (β = 0.023, p = 0.137) and the long run (β = 0.015, p = 0.145). The Error Correction Model validates robust long term correlations with an adjustment coefficient of 0.345 (p = 0.025), signifying that roughly 34.5% of disequilibrium in FDI is rectified each year. The results substantially enhance comprehension of FDI drivers in resource dependent developing nations and provide pragmatic recommendations for Nigeria’s investment promotion strategy, emphasising the maintenance of optimal liquidity via balanced monetary expansion and the need to complement interest rate policy with other investor confidence measures