Impact Of Monetary Policy on Stock Market Development: Implications for the Nigerian Economy (Published)
The unsustainable and decreasing contribution of the Nigeria stock market to economic growth and development is the rationale for this study. Previous studies were unable to fully address the core developmental problems of the stock market in terms of its contribution to economic growth. These studies focused on how the monetary authorities can stabilize the stock market and reduce its volatility but ignored issues bordering on the contribution of the stock market to economic growth, which of course is the essence of any stock market and as such characterize its development. Consequently, the objective of this study is to investigate the impact of monetary policy on the development of the stock market in Nigeria. The study period covered from 1981 to 2015. Cointegration and vector error correction modelling (VECM) were employed for the analysis. The cointegration test indicates that there exist long run equilibrium relationship among the variables of the model. VECM result indicated that monetary policy, through the growth rate of money supply has impacted positively and significantly on the development of the stock market in Nigeria. Also, findings further indicated that prime lending rate has had a negative impact on the development of the stock market in Nigeria. The study recommended among others, that the Central Bank of Nigeria (CBN) should use its growth rate of money supply to further boost the development of the stock market but must however be mindful of the channeling of the increase in money supply in order to curtail the possible negative impact of inflation.
Stock markets provide channels for the mobilization and allocation of funds in the economy to be used by firms and others in fully exploiting their material, human and management resources for optimal output. The stock market itself can be influenced by macroeconomic factors prevalent in the economy. A co-integration and error correction model was employed on macroeconomic data from Nigeria and the results suggest that factors such as national savings rate, inflation rate, economic growth rates and financial intermediary development influenced stock market development during the period 1970-2011. Results from the Chow test suggested that there was no structural break in stock market development after the introduction of the Structural Adjustment Programme in 1986. It was recommended that stabilizing the financial and economic aggregates by the government for the overall growth of the economy will help to grow the stock market. JEL Classification: G20, G28, E44, O55