Effect of Monetary Policy on the Performance of the Nigerian Capital Market (1986 – 2016): Stylized Facts from ARDL Approach

In this study, the empirical effect of monetary policy tools on performance of the Nigerian capital market was re-examined. The real effect of monetary policy tools on capital market performance is still not clear both from theoretical and empirical background, especially in emerging economies like Nigeria. Explicitly, this study evaluated the effect of monetary policy rate (the rate at the Central Bank of Nigeria extend credit facility to other financial institutions operating in the country), cash reserve ratio, liquidity ratio and loan to deposit ratio on the performance of the Nigerian capital market. Nigerian Stock Exchange and Central Bank of Nigeria annual reports of various edition supplied the relevant data for analysis. The Autoregressive Distributive Lag (ARDL) was the technique applied in estimating the model and for co-integration assessment, while granger causality analysis aided in ascertaining the effect of monetary policy tools on capital market performance. The result of the analysis illustrated that monetary policy tools and capital market performance in Nigeria are not co-integrated. The study also found that Nigerian capital market performance is not significantly affected by monetary policy announcement by the Central Bank of Nigeria rather, it is monetary policy rate that is significantly influenced by performance of the capital market. Based on the application of a superior methodology by way of ARDL in data analysis, the Central Bank of Nigeria should be cautious and properly consider the prevailing macroeconomic condition in monetary policy decision, especially with regard to liquidity ratio because of its potential in fuelling or deterring inflation which affects prices of stocks in the capital market.