The stock market channel of monetary policy transmission mechanism in Nigeria.

Abstract

This paper investigates the impact of monetary policy on the stock market in Nigeria. We found that the current operating target of monetary policy, the monetary policy rate, influences bank retail rates and the level of activities in the stock market. However, we also found that the level of responsiveness is small and that aggregate activity responds marginally to changes in bank lending rates. The latter are not influencing domestic credit, as the interest elasticity of credit demand is low. The paper explains the reason why policy rate even though moves in the right direction according to economic theory, does not have a robust and significant relationship with activities in the stock market. The remainder of the paper is organized as follows: Section II discusses the evolution of monetary policy in Nigeria, and outlines the recent monetary policy stance in Nigeria. Section III reviewed some related literature on monetary policy transmission mechanism. Data and empirical analysis, encompassing description of the data and a presentation of the results are treated in Section IV. Section V presents the main conclusion.