Journal of Statistical and Econometric Methods

The Monetary Policy Rate of the Central Bank of Nigeria (CBN) and the Nigerian Stock Market: A Structural Var Analysis

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  • Abstract


    This study examines the dynamic relationship between stock market performance and the CBN monetary policy rate between the period of 1973-2012. We utilized the “all share price index” in the Nigerian stock exchange as a measure of stock market performance and the official rate of interest at which the CBN lends money to money deposit banks in the country as a measure of the monetary policy rate. The author estimated the SVAR model. The major finding in the study is that stock market performance is negatively associated with the CBN monetary policy rate in Nigeria. In effect, if the CBN monetary policy rate was high, investors would move from high risk stock market to invest in low risk bank deposits while, if the CBN policy rate is low, investors may prefer to invest in the stock exchange market. Given the peculiarities of Nigerian economy, hikes in the short term CBN monetary policy rate might be counter-productive. The soaring rate of the CBN is amplifying fears in some quarters of the country that the reform measures currently being implemented by the CBN may soon run into a hold-up since bank loans are gradually being priced out of the reach of most economic operators in the economy. Therefore, additional practical measures to enhance the performance of the Nigerian Stock Exchange should be implemented.