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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 all share index.  To achieve these objectives, the study employed the Ordinary Least Square (OLS) econometric technique in which time series data was collected for the period 1985-2014.Using Secondary data collected from Central Bank of Nigeria and 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 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 indexand Treasury bill rate (TBR), negatively related to the All Share price index. The dominanceof insignificant negative relationship between monetary variables and 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.








Cover Page                  –                                   –                                   –                                   i

Title Page                    –                                   –                                   –                                   ii

Declaration Page         –                                   –                                   –                                   iii

Approval Page                        –                                   –                                   –                                   iv

Dedication                  –                                   –                                   –                                   v

Acknowledgements    –                                   –                                   –                                   vi

Abstract                      –                                   –                                   –                                   vii

List of Tables              –                                   –                                   –                                   viii



CHAPTER ONE; INTRODUCTION        –                       –                       –                       –           1

1.1       Background of study              –                       –                       –                       –           1

1.2       Statement of problem             –                       –                       –                       –           6

1.3       Objectives of the study           –                       –                       –                       –           7

1.4       Research Questions                 –                       –                       –                       –           7

1.5       Hypotheses of the Study        –                       –                       –                       –           7

1.6       Scope of the study                  –                       –                       –                       –           8

1.7       Limitation of the study           –                       –                       –                       –           8

1.8       Significance of the study        –                       –                       –                       –           8

1.9       Definition of Key Terms         –                       –                       –                       –           9


CHAPTER TWO; REVIEW OF RELATED LITERATURE              –                       –           11

2.1       Conceptual Issues                   –                       –                       –                       –           11

2.1.1    Objectives ofMonetary Policy                                    –                       –                       –           16

2.1.2    Analysis of Macroeconomic Indicators and Market Shares Index in Nigeria            –           25


2.1.3    Performance of the Nigerian Capital Market since 1986:                   –                       –           26

2.1.4    Problems of the Nigerian Capital Market                   –                       –                       –           29

2.1.5    Prospects for Improved Performance of the Market              –                       –           34

2.1.6    Concept of Stock Market Growths                –                       –                       –           36

2.2       Theoretical Literature              –                       –                       –                       –           38

2.2.1    Counter Theoretical Argument of Monetary Policies   and Capital Market   –           43

2.2.2    Transmission of Monetary Policy                   –                       –                       –           45

2.3       Empirical Literature Review   –                       –                       –                       –           47

2.4       Review Summary                    –                       –                       –                       –           55

2.4.1    Critique of the Literature        –                       –                       –                       –           57

2.4.2    Gap Identification                  –                       –                       –                       –           58


CHAPTER THREE; RESEARCH METHODOLOGY              –                       –           59

3.1       Research Design                     –                       –                       –                       –           59

3.2 Source of Data                              –                       –                       –                       –           59

3.3 Variable of the Model                   –                       –                       –                       –           59

3.4       EmpiricalModel Specification                         –                       –                       –           60

3.5       Techniques of Data Analysis  –                       –                       –                       –           61

3.5.1    Ordinary Least Square (OLS) –                       –                       –                       –           61

3.6       Criteria for Interpretation of Result                –                       –                       –           62

3.6.1    The Economic Criterion                                  –                       –                       –           62

3.6.2    The Statistical Criterion                      –                       –                       –                       –           62

3.7       Apriori Expectation                                        –                       –                       –           63


CHAPTER 4: DATA ANALYSIS AND PRESENTATION                  –                       –           65

4.1       Data Presentation                    –                       –                       –                       –           65

4.2       Summary of Descriptive Statistics                  –                       –                       –           66

4.3       Result of Research Hypothesis One and Research Question One     –                       –           68

4.4       Result of Research Hypothesis Two and Research Question Two    –                       –           70

4.5       Result of Research Hypothesis Three and Research Question Three             –           71

4.6       Result of Research Hypothesis Four and Research Question Four    –                       –           73

4.7       A Priori Expectation for the Variables in the Models            –                       –           75

4.8       Policy Implication of Findings           –                       –                       –                       –           75



5.1           Summary                             –                       –                       –                       –           78

5.2           Conclusion                          –                       –                       –                       –           79

5.3    Recommendation                       –                       –                       –                       –           80

References                              –                       –                       –                       –           82












List of tables


4.1       All Share Index, Money Supply, Exchange Rate, Interest Rate, and Treasury Bill Rate

from 1985 to 2014                              –                       –                       –                       65

4.2       Summary of Descriptive Statistics for the Variables of the

Study  –                       –                       –                       –                       –                       66

4.3       OLS Regression Result for Model 1  –                       –                       –                       68

4.4       OLS Regression Result for Model 2  –                       –                       –                       70

4.5       OLS Regression Result for Model 3  –                       –                       –                       71

4.6       OLS Regression Result for Model 4  –                       –                       –                       73

4.8       Apriori Expectation    –                       –                       –                       –                       75








1.1       Background of The Study

Monetary policy is a policy framework that determines the volume, cost and availability of credit in an 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 towards 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 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 a 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 instrumentswas not achievable by then, because of the underdeveloped nature of the financial markets andthe 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 invigoratethe productive sector, and there by stem inflationary pressure on goods and services. The settling of interest rate at relatively low levels is done fundamentally to promote investment growth and development. Occasionally, special deposits were imposed to reduce the amount 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 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 policy makers to accomplish other commendable macroeconomic objectives. There is infact a general consensus that domestic price fluctuation undermines the function of money as a store of value, and frustrates investment and growth. Empirical studies (Fischer, 1994) on inflation, growth and productivity have confirmed the long-term inverse relationship between inflation and growth. Given the achievement of price stability and the conditions of the financial markets and institutions would create a high level of certainty, such that the financial infrastructures of the economy can meet the requirements of market participants. Indeed, an unstable or crisis-ridden financial sector will render the transmission mechanism of monetary policy less effective, making the accomplishment and maintenance of strong macroeconomic fundamentals difficult. This is on the grounds that; it is only in a period of price stability that investors and consumers can translate market flags accurately. Typically, in periods of high inflation, the skyline of the financial specialistis very short, and resources are diverted from long-term investments to those with immediate returns and inflation hedges, including real estate and currency speculation.

The issue which has occupied the investment awareness of investors in the Nigerian capital market is the effectiveness of the monetary policy changes in influencing equity prices. Monetary policy could be communicatedas the procedure by which the monetary authority of a country controls the supply of money. The official objectives as a rule incorporate moderately stable costs and low unemployment level. In other words of Okapra (2010), monetary policy is a measure intended to impact the accessibility, volume and direction of cash and credits to accomplish the desired monetary goals. On its own the capital market encourages capital formation and generates liquidity for expansion of industries, the impact which is seen in the real output of the country.

According to Durham (2001), financial expert have given reasons why changes in the discount rate influence stock returns. He posits that discrete policy rate changes influence forecasts of market determined interest rate and equity cost of capital. Thus changes in the discount rate possibly influences expectations of corporate profitability.

However, the relationship between monetary policy and equity market has been linked to the transmission mechanisms of monetary policy. The Nigerian capital market is a transmission mechanism of monetary policy action that influence stock prices which themselves are connected to the real economy through their influences on utilization spending (wealth effect channel) and investment spending (balance sheet channel).

Napolitano (2006), opine that several proposed transmission mechanism link changes in the central bank monetary policy to stock market which in turn affects output via consumer expenditure as well as investment spending. The performance of the stock market can be linked to the changes in the monetary policy, particularly during extended periods of rapid appreciation or decrease in real stock prices. Thus the capital market is a real transmission for monetary policy. In different economics of the world, monetary policy effect on capital market vary according to peculiarity and prevailing economic conditions as well as efficiency of the stock market in responses to new policies. As a result of the above, the transmission mechanism may differ, it’s believed that the operations of the monetary policy transmission channels may vary systematically across countries due to differences in the extent of financial intermediation that is in the development of capital market and structural economic conditions, the effect of the monetary policy tools on stock prices may vary across countries, the size concentration and health of the banking system.

Nigeria stock market being an emerging market shows its own behavior due to changes in the structural economic condition in Nigeria economy. Just like high inflation level, is the consequence of poor monetary management in an economy.This occurs when there is a upward movement in the average level prices of goods and services, there is a level tolerable in the economy. The stock market therefore is expected to establish the prices of policies which include the monetary policy.

Furthermore, reasonable number of financial researchers havecontended the possibility of distortion in equity prices with changes in monetary policy rates whether monetary policy influences the stock market performance has become an issue of continuous debate and controversy in financial literatures. Though  monetary policy are implemented through financial institutions of which the stock market is one of the high liquidity generated on daily basis at stock exchange market, which  has poised the central bank and the monetary policy managers to believe that the capital market is an appropriate avenue for monetary policy implementation in order to bring stability in the economy. Whether this believe is correct, has also become a financial assets by adjusting too, to many economic conditions and government matter of concern to financial researchers and can only be supported by empirical research findings to possibly establish how equity prices react to changes in monetary policy rates.

Similarly, it is arguable that monetary policy should exert significant influence on stock market. This as a matter of fact should also manifest in the behavioral relationship of equity prices movement and monetary policy rate adjustment in the economy. Therefore, the uncertainty in the adjustment of monetary policy rates affects investor’s returns in financial assets investments. This uncertainty of behaviour patterns of course, has pushed this study to investigate the relationship jointly with a view to determining whether the changes in monetary policy rates significantly influence the capital market in Nigeria.



1.2       Statement of the Problem

Empirical findings from related literature suggest that the impact of monetary policy on capital market have been inconclusive. Osisanwo and Atanda (2012), Maku and Atanda (2009), Ikoku (2007) and Minsoo, Hauhwa and Jun (2006) argued that the performance of the capital market is influenced by monetary policy variables such as interest rate, exchange rate, minimum rediscount rate and money supply. The findings of Adaramola (2011) revealed that interest rate, money supply, exchange rate and inflation have varying significant impact on Nigeria Capital Market as reflected in stock prices. This is contradicting as the empirical result of Akpan and Chukwudum (2014) indicated that interest rate has no significant impact on Nigeria Capital Market and it is not an important determinant when considering the changes in Nigerian capital market.

Favourable monetary policies are expected to impact positively on the capital market and vice versa; which might be instantaneous, lagged or even anticipatory. The capital market sensitiveness to external shock resulting from changes in monetary policies and global financial meltdown have affected its performance as evidenced in all share index depreciation from 57990.2 points in 2007 to 41329.2 points in 2013. Following the fact that monetary policy variables have taken different values over the years alongside the capital market all share index, an indicator of capital market performance, can it be said that monetary policy variables such as interest rate, exchange rate, money supply and minimum rediscount rate impacted on capital market in Nigeria? This study is faced with the problem of ascertaining the level of effect of monetary policy on Nigerian Capital Market.empirical findings on monetary policy impact on capital market that this research work is been studied.

1.3       Objectives of the Study

The broad objective of this study is to examine the impact of monetary policy on the Nigerian capital market. The specific objectives are as follows:

1          To examine the effect of Money Supply on Nigerian Capital Market.

2          To assess the effect of Exchange Rate on Nigerian Capital Market.

3          To evaluate the effect of Interest Rate on Nigerian Capital Market.

4          To ascertain the effect of Treasury Bill Rate on Nigeria Capital Market.

1.4       Research Questions

The study is designed towards answering the following relevant question:

1          How significant is the effect of Money Supply on Nigerian Capital Market?

2          To what extent Exchange Rate affectsthe Nigerian Capital Market?

3          To what level has Interest Rate affected the Nigerian Capital Market?

4          To what measure Treasury Billaffects the Nigerian Capital Market?

1.5       Hypotheses of the Study

The hypotheses that will be tested in the course of this research are stated as follows:

1          H0: Money Supply has no significant effecton Nigerian Capital Market.

2          H0: Exchange Rate has no significant effect on Nigerian Capital Market.

3          H0: Interest Rate has no significant effect on Nigerian Capital Market.

4          H0: Treasury Bill Rate has no significant effecton Nigerian Capital Market.

1.6       Significance of the Study

This research provided insight into monetary policy measures as an instrument of economic stabilization and will therefore be of valuable use to the following set of people.

(i)         Academians:  It will add to the existing body of knowledge of already existing publications and a source of reference to academians.

(ii)        The private and public sector: It will lead to their greater understanding of monetary policy and capital market and guide them in their decision making as regards how and when best to make investments and enable them make predictions.

(iii)       The Government: it will bring their attention on the effect of monetary policy on the capital market thereby proffer the right instrument that will enhance its growth.

(iv)       The Ordinary Reader: this work will serves as an open eye and a valuable store of knowledge.


This research work focuses on examining the influence of monetary policy, (inflation rate, money supply, interest rate, exchange rate, Treasury Bill Rate) on the Nigerian capital market. This research involves a time series analysis spanning from 1985-2014 obtained from CBN statistical bulletinand the solution to the problems facing the implementation and working of monetary policies in Nigeria.


The limitation of this research work include, the exclusion of some variables, which otherwise might have led to a more reliable and genuine conclusion to the problem studied, is not enough due to many things to be accomplished with the limited time the researcher have in order to equip myself academically also, inconsistency of data as observed is also a delimiting factor to this project.


1.9              DEFINITION OF KEY TERMS

Monetary policy

Monetary policy is the process by which the central bank or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy (Nelson, 2008).

Capital market

It is a market for government securities, for corporate bonds, for the mobilization and utilization of long-term funds for development – the long term end of the financial system (Osinubi, 2006). Capital market is a collection of financial institutions set up for the granting of medium and long term loans.

Money Supply

Money supply or money stock is the total amount of monetary assets and other liquid instrument available in a country at a specific time.

Minimum Rediscount Rate

This is the rate of interest charged to member banks when they borrow from the Federal Reserve System.

Exchange Rate

The price for which the currency of a country can be exchange for another country currency.

All Share Price Index

The All Share Price Index refers to the change in the average value of all the share prices of all companies on the Nigeria stock exchange which is use as a measure of how well the market is performing. What this means is that the index will rise if majority of the companies that have increased their share price over the years constitute a major portion of the index.

Interest Rate

            An interest rate is the rate at which interest is paid by borrowers (debtors) for the use of money that they borrow from lenders (creditors). Interest rate is a vital tool of monetary policy.


Treasury Bills

Treasury billare safe money market investments backed by government. They are considered as risk-free because they are backed up by the government to regulate money supply or  manage liquidity system in a country.



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