Monetary Policy and Stock Market Development: The Nigeria Experience

Monetary policy is intended to ensure price stability and adequate employment which in turn will create a stable macroeconomic environment for economic prosperity. It is of great concern to policy makers that monetary policy permeates deeply into the real sector to engender economic growth. The major objective of this study is to explore the monetary policy effects on the Nigerian Stock Market over time.. The Phillip-Perron (PP) unit root test was the method used to test stationarity of the variables while the Johansen Co-integration approach was conducted to test for long run relationship between the variables used. The study found that Monetary Policy Rate, Broad Money Supply and Per Capita Income have significant long run relationship with the development of the Nigerian Stock Market. It therefore recommends among others that the monetary authority in Nigeria (CBN) should as a matter of practice operate a long-term monetary plan that allow the monetary policy rate to be consistent. The constant mop up of money after an expansionary monetary policy by the CBN should be discouraged since it creates instability in the money market making other money rates to be unstable and compounds the volatility rate of the country’s stock prices. Finally, the gap between the Central Bank of Nigeria (CBN) targeted broad money and actual broad money growth should be curtailed by reducing the frequency of its mop ups which usually send wrong signals to investors in the stock market