This paper examined the response of foreign portfolio investment to Monetary Policy decisions of the Central Bank of Nigeria using monthly data spanning January 2007 to December 2018. The study adopted the Toda-Yamamoto Causality model and Generalized Impulse Response Function for analysis. The results showed that changes in monetary policy stance could only impact the behavior of foreign portfolio investment with 6-month lag and with marginal impact. This implies that monetary policy could still be effective even if the CBN decides to lose policy stance without losing significant capital flight. The conclusion from the findings is that monetary policy is just a signaling instrument for portfolio investors in Nigeria because it influences foreign portfolio investment through the Treasury bill rate rather than through MPR and CRR. The marginal response of investment due to changes in policy rate from the GIRF validate the TY results by indicating that monetary policy rate changes on its own may not be what investors are concern about, rather the expectation of the rates future path. The cash reserve ratio as a monetary policy tool does not seem to exert any impact on foreign portfolio investment.
The fast development in the financial system has attracted researchers’ interest in studying its implication on the economy, though empirical evidence is highly limited on disaggregated levels. This study is undertaken to examine the impact of disaggregated financial development on the effectiveness of monetary policy in Nigeria. The study used Autoregressive Distributed Lag Model to capture the data-generating process as well as both short-run and long-run relationships. The scope of analysis ranged from 2000 quarter 1 to 2021 quarter 4 to circumvent the effect of regime changes, as the chosen time horizon represents the period of the uninterrupted civilian regime in Nigeria. The data are sourced from the Central Bank of Nigeria’s and the International Monetary Fund’s statistical databases. Moreso, quarterly frequency data are used to reflect the short-run nature of the monetary policy. The finding reveals financial market development enhances the effectiveness of monetary policy in terms of achieving both its primary and secondary objectives while financial institutions development does not. Given the findings, it is recommended that the Government together with the Central Bank of Nigeria should design policies that would enhance the efficiency of the financial market, particularly markets infrastructure and technology-based products to reduce information asymmetry and transactional costs to ease the way of doing business.
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