MONETARY POLICY AND CAPITAL MARKET PERFORMANCE IN NIGERIA: EVIDENCE FROM A VECTOR ERROR CORRECTION MODEL, 1981-2024
Abstract
This study examined the effect of monetary policy on capital market performance in Nigeria for the period 1981 to 2024. Monetary policy rate, cash reserve ratio, liquidity ratio, broad money supply, and external reserves were used to represent monetary policy while market capitalization was used as a surrogate for capital market performance. Data on the aforementioned variables were sourced from Central Bank of Nigeria (CBN) Statistical Bulletin. The data set generated was exposed to descriptive analysis, unit root test, Johansen cointegration test, pairwise granger causality test and Vector Error Correction Model (VECM) estimation. Mainly, results revealed that there is a long run equilibrium relationship between monetary policy and capital market performance with the speed of convergence in event of disequilibrium being 32.68% annually. Also, market capitalization granger-causes liquidity ratio, not the reverse, and there is no causality between the other monetary policy-related variables and market capitalization. In addition, monetary policy rate, liquidity ratio and external reserves have negative effects on stock market capitalization while cash reserve ratio and broad money supply have direct influences on stock market capitalization, however, only the effect of broad money supply was statistically significant in the short run. The study concluded that monetary policy has mixed effects on capital market performance in Nigeria. Hence, there is urgent need to further develop the Nigerian capital market in order to enable the manipulation of monetary policy instruments like monetary policy rate so as to have the desired effects on the capital market.
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Published in INTERNATIONAL JOURNAL OF ACCOUNTING, FINANCE AND TAXATION
ISSN: 3027-0378
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