Impact of Monetary Policy on Stock Market Prices in Nigeria

Abstract

The paper investigated the relationship between monetary policy and stock market prices in Nigeria and through assess whether monetary policy influences stock market prices, for the period 1985 to 2015. The Dynamic and Fully Modified Ordinary Least Squares (DOLS & FMOLS) techniques were used for the analysis, while the error correction model (ECM) framework was deployed for robustness. A long-run equilibrium relationship was found among the variables used. The empirical results indicated that monetary policy rate, credit to private sector, exchange rate and broad money supply are positively related to stock market prices captured by the all share index in either the DOLS or FMOLS frameworks. Exchange rate and broad money supply were found to have statistically significant impact on stock market prices. The estimated ECM equations showed that the short-run determinants of stock prices are largely from are credit to private sector, exchange rate and one period lagged exchange rate; while monetary policy rate and broad money supply have a negative relationship with stock market prices in the short-run. It is therefore evident from the results of this study that some monetary policy instruments can be a better predictor of stock market prices in Nigeria. In the light of this, it is recommended that monetary authorities should be cautious enough to avoid discretionary policies that might hike the rate of interest; otherwise the flow of fund to the market will be derailed. Also, the government should fine turned the exchange rate policy and institute a consistent policy plan to mobilize surplus funds from abroad, which would be injected into the capital market for significant development