Impact of Broad Money Supply, Exchange Rate, Monetary Policy Rate and Inflation on Nigerian Stock Market Returns (1985-2023)

Abstract

The stock market plays a vital role in mobilizing long-term capital, and its performance is influenced by key macroeconomic conditions. This study examines the impact of monetary policy variables on stock market returns in Nigeria from 1985 to 2023. Specifically, it investigates the effects of broad money supply (M2), exchange rate (FXR), monetary policy rate (MPR), and inflation (INF) on the All Share Index (ASI), which serves as a proxy for stock market performance. Employing an ex post facto research design, secondary data were obtained from the Central Bank of Nigeria Statistical Bulletin. The Augmented Dickey-Fuller (ADF) test was used to assess stationarity, while cointegration and the Autoregressive Distributed Lag (ARDL) model were employed to analyze both short-run and long-run relationships among the variables. The stationarity results reveal that M2, FXR, and INF are integrated of order zero [I(0)], whereas ASI and MPR are integrated of order one [I(1)], indicating a mixed order of integration. The findings show that inflation negatively affects stock market returns, while the exchange rate has a positive long-run influence but an insignificant short-run effect. Moreover, both the monetary policy rate and broad money supply exert positive effects on the ASI, with the latter demonstrating a statistically significant impact. The study concludes that monetary policy variables have both positive (M2 and MPR) and negative (FXR and INF) influences on stock market performance in Nigeria. It recommends that policymakers strengthen institutional and policy frameworks to ensure effective monetary management, focusing on domestic policy instruments that can mitigate the adverse effects of external economic shocks.