ASSESSMENT OF THE ROLE OF MONETARY POLICY IN FOSTERING THE STOCK MARKET IN NIGERIA

Abstract

This investigation evaluates the influence of monetary policy on the evolution of stock market dynamics within the Nigerian context, employing a Vector Autoregression methodology with data encompassing the timeframe from 1986 to 2023. The study utilizes an ex-post facto methodology, drawing upon secondary data obtained from the Central Bank of Nigeria's annual statistical bulletin and the World Development Indicator (WDI) database for the fiscal year 2023. A unit root test was performed utilizing the augmented Dickey-Fuller (ADF) methodology to assess the stationarity of the variables, with the outcomes confirming that all variables exhibit stationarity. A co-integration analysis was conducted, yielding empirical support for a long-term relationship among the examined variables. The outcomes indicate considerable associations between monetary policy strategies and stock market signals, with Open Market Operations and the Monetary Policy Rate playing a critical role in shaping the All Share Index. The variance decomposition analysis elucidates that the forecast error variance of the All Share Index is mainly driven by its own shocks, complemented by subsequent impacts from shocks pertinent to Open Market Operations and the Monetary Policy Rate. The outcomes of this analysis are important for policymakers, stakeholders, and researchers, accentuating the critical role of thoughtful monetary policy strategies in the stabilization of the stock market. This investigation augments the current corpus of literature pertaining to the mechanisms of monetary policy transmission in emerging economies.