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Effects of Monetary Policy on Nigerian Capital Market (PDF)

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– Effects of Monetary Policy on Nigerian Capital Market –

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Abstract

This research work examined the effect of monetary policy on the Nigerian stock market by specifically examining the impact of monetary policy on money supply, treasury bill rate, exchange rate, interest rate, and inflation rate on the all-share index.

To achieve these objectives, the study employed the Ordinary Least Square (OLS) econometric technique in which time-series data were collected for the period 1985-2014.

Using Secondary data collected from the Central Bank of Nigeria and the Nigerian Stock Exchange. This period was considered due to the liberalization of the financial sector.

Following the outcome of this study, the results revealed that Broad Money Supply(M2) and, Exchange rate(EXR) are positively related to the All Share Price Index at a 5% level of significance of 53.86% and 66.81% changes in the all-share index respectively.

Interest rate (INT)as a monetary policy tool at 5% level of significance has a negative influence on all share index of 1.5% variation in the market index and Treasury bill rate (TBR), negatively related to the All Share price index.

The dominance an insignificant negative relationship between monetary variables and the stock market indicates that there is a disconnection between monetary policy and stock market.

Hence we recommend that, monetary authorizes should formulate policies that will stabilize significant macroeconomic indicators in order to promote the capital market.

Introduction

1.1 Background of the Study

Monetary policy is a policy framework that determines the volume, cost, and availability of credit in the economy of any country. This policy objective can only be achieved through the monetary policy tools as employed by the monetary authorities, the Central Bank of Nigeria (CBN).

Since its foundation in 1959, the Central Bank of Nigeria (CBN) has kept on assuming the conventional part expected of a national bank, which is the regulation of the supply of cash so as to advance the social welfare (Ajayi, 1999).

This part is tied down on the utilization of money related arrangement instruments that is normally focused on the accomplishment of full-livelihood balance, fast financial development, value security, and outer equalization (Fasanya et al, 2013; Adesoye et al, 2012).

Over the years, the real objectives of monetary policy have often been the two last objectives.

In this way, development concentrating on and change scale course of action have told CBN’s money related system focus in perspective of the assumption that these are key gadgets of completing macroeconomic soundness (Aliyu and Englama, 2009).

The money related environment that guided monetary methodology before 1986 was portrayed by the transcendence of the oil fragment, the expanding part of the overall public section in the economy, and over-dependence on the outside division of the economy.

Remembering the deciding objective to keep up worth soundness and strong equality of portions position, cash related organization depends on upon the use of direct monetary instruments, for instance,

credit rooftops, particular credit controls, controlled advance charges, and exchange rates, and what’s more the arrangement of cash store requirements and special stores.

The use of market-based instruments was not achievable by then, because of the underdeveloped nature of the financial markets and the deliberate impediment on credit charges.

The most mainstream instrument of monetary policy is the issuance of credit proportioning rules, which primarily set the rates of change on the components and aggregates commercial bank loans and advances to the private sector.

The sectorial designation of banks’ credit in CBN rules is to invigorate the productive sector and thereby stem inflationary pressure on goods and services.

The settling of the interest rates at relatively low levels is done fundamentally to promote investment growth and development. Occasionally, special deposits were imposed to reduce the number of free reserves and credit-creating capacity of the banks.

Minimum cash ratios were stipulated for the banks in the mid-1970s on the reason of their total deposit liabilities, but since such cash ratios were usually lower than those voluntarily maintained by the banks, they demonstrated less effective as a restraint on their credit operations.

In general terms, monetary policy refers to a blend of measures intended to control the quality, supply, and cost of money in an economy in consonance with the ordinary level of money related activity (Okwu et al, 2011; Adesoye et al, 2012).

For most economies, the goals of monetary policy include price stability, maintenance of the balance of payments equilibrium, promotion of employment and output growth, and sustainable development (Folawewo and Osinubi, 2006).

These objectives are important for the fulfillment of internal and external balances, and the advancement of long-run economic growth.

The importance of price stability is derived from the harmful effects of price volatility, which undermines the capacity of policymakers to accomplish other commendable macroeconomic objectives

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