Impact of Monetary Policy on Capital Inflows in Nigeria

Abstract

Foreign capital flows depends on the prevailing monetary forces as supported by capital flows theory and the mechanism linking these two variables is that contraction of net domestic assets through an open market sale of bonds will place upward pressure on domestic interest rates. Higher interest rates attract foreign funds, generating a capital inflow which relieves the pressure on domestic interest rates. Has this actually happened? It is against this backdrop that the present study investigated the impact of monetary policy on international capital inflows in Nigeria for a period of 22 years (1994-2015) using time series data. The autoregressive distributed lag technique revealed that the short-run and long-run significant determinants of foreign capital inflows are largely from broad money supply, nominal exchange rate, inflation rate and interest rates spread except inflation rate that is insignificant in the long-run. This outcome upholds theoretical prediction. Long-run equilibrium relationship was found between the dependent variable and the regressors. Further examination of the short run dynamics of the model showed that the speed of adjustment coefficients ECM (-1) to restore equilibrium have a negative sign and statistically significant at 1% level, ensuring that long-run equilibrium can be attained and about 89% of the short-run deviation from the equilibrium (long-run) position is corrected annually to maintain the equilibrium. Since the empirical evidence revealed that monetary aggregates such as broad money supply, nominal exchange rate, inflation rate and interest rates spread influence foreign capital inflows, it is therefore recommended that government should continue to pursue expansionary monetary policy and foreign exchange policies that would ensure competitiveness of the economy in order to attract the much needed foreign capital inflows that would engender economic growth.