Abstract: Foreign Direct Investment (FDI) has consistently been acknowledged as an important contributor to capital transfer, technology diffusion, job creation, and overall economic development, particularly for emerging and developing economies like Nigeria. The extent to which a country can attract FDI depends on its macroeconomic environment as well as the strength of its institutional framework. Among the macroeconomic factors, monetary policy variables such as the liquidity ratio, monetary policy rate (MPR), and money supply play a significant role in shaping the decisions of foreign investors. However, studies on the actual extent and direction of the impact these variables have on FDI inflows are rather scarce, particularly when moderated by the quality of institutions in the host country. This study therefore, examined the effect of monetary policy variables, liquidity ratio, monetary policy rate, and money supply on FDI, while introducing institutional quality as a moderating variable. This study adopted the Error Correction Mechanism (ECM) approach to analyze annual time series data spanning 27 years (1994 – 2024). ECM results of monetary policy variables and foreign direct investment showed the error correction term (CointEq (-1)) is -0.7370 and significant (p = 0.0006); R2 = 0.5470, confirming a strong long-run equilibrium. About 73.7% of FDI deviations from long-run trends are corrected in the next period. Furthermore, the ECM results of monetary policy variables, institutional quality, and foreign direct investment, the error correction term (CointEq (-1)) is – 0.7193 and significant (p = 0.0023); R2 = 0.5553. Results revealed that 71.9% of FDI deviations from the long-run are adjusted to the equilibrium. Specifically, the ECM results for both the short-run and long-run models produced similar outcomes since both models showed a wide, negative, and statistically significant error correction term. The model of institutional quality indicates a marginal slow speed of adjustments, implying that while long-run effects appeared in both models, institutional quality slightly moderated the speed at which FDI returned to equilibrium. The study recommended that monetary authorities consider long-term monetary policy outcomes in conjunction with institutional frameworks in order to attract more FDI inflows.

Keywords: CBN, ECM, FDI, institutional quality, Monetary policy, Monetary policy rate, Liquidity ratio, Inflation rate

Pages: 1201-1210