Monetary Policy and Stock Market Capitalization in Nigeria

Abstract

This study examined the effect of monetary policy on stock market capitalization in Nigeria over the period 1986–2024. The study employed the Autoregressive Distributed Lag (ARDL) technique to analyze both the short-run and long-run dynamics between stock market capitalization and key monetary policy variables, including Monetary Policy Rate (MPR), Broad Money Supply (MS), Liquidity Ratio (LIQ), and Inflation Rate (INF). Preliminary analyses such as descriptive statistics, correlation matrix, and unit root tests were conducted to ensure data suitability and model reliability. The results of the unit root test revealed a mixed order of integration among the variables, justifying the adoption of the ARDL approach. The empirical findings indicate that monetary policy exerts a significant influence on stock market performance in Nigeria, particularly in the long run. The Monetary Policy Rate was found to have a negative and statistically significant effect on stock market capitalization, suggesting that higher interest rates discourage investment in equities and hinder capital market growth. Conversely, money supply and liquidity ratio exhibited positive and significant effects, highlighting the importance of adequate liquidity in stimulating market expansion. Inflation, however, was found to have no significant long-run effect on stock market capitalization. The error correction mechanism confirmed the existence of a long-run equilibrium relationship among the variables, with a stable but slow speed of adjustment to short-run disequilibria. The study concludes that monetary policy is a critical tool for financial market development in Nigeria and recommends that CBN and commercial banks should prioritize policies that enhance liquidity in the financial system, such as effective open market operations and targeted credit facilities.