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The Effect Of Monetary Policy On Stock Market Performance In Nigeria


ABSTRACT

This paper investigates the impact of monetary policy variables on the performance of the stock market in Nigeria using quarterly data for twenty four years (1984:1 – 2007:4). A linear combination of stock market index and monetary policy variables is estimated using ordinary least squares; co-integration and error-correction specification. 

It is observed that stock market performance is strongly determined by broad money supply, exchange rates and consumer price index in the short and long-run. Hence, the liquidity, exchange rate and price level channel of monetary policy transmission is supported by evidence as determinants of stock price movements in Nigeria. 

On the other hand, minimum re-discount rate and treasury bill rates show mixed results, they were unable to demonstrate significant relationship to changes in stock market index, though their coefficients follow expectations. However, on a parsimonious examination of the variables, it is observed that a significant relationship exists if used indiscriminately. 

Hence, for the interest rate channel of monetary policy transmission to effect changes in stock market index either minimum re discount rate or treasury bills rate should be applied at a time and not simultaneously.    

Key Words: 

monetary policy, stock market index, co-integration and error-correction model.








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