Monetary-Fiscal Policy Mix and Stock Market Performance in Nigeria: The Role of Quality of Governance and Political Stability

Abstract

This study examined the impact of mixed monetary –fiscal policy measures on the performace of capital market in Nigeria.  The study made use of annual data on value of stocks traded, credit to the private sector, gross domestic product, inflation domestic investment and broad money supply, political stability and quality of governance among other from 1970-2020. This study employed the vector autoregressive model, the impulse response function and variance decomposition and the result suggested that credit to the private sector and broad money supply had a negative and insignificant impact on capital market capitalization while inflation impacted positively, although insignificant on capital market performance. The result further showed that investment and government expenditure as fiscal variables had a negative and insignificant impact on capital market performance. Quality of governance negatively and insignificantly impacted on capital market performance while political stability had a positive and insignificantly impacted on capital market performance. From the variance decomposition and impulse response function, the result showed that market capitalization was strongly endogenous in predicting itself by about 93 percent in the short-run and about 86 to 85 percent in the long-run. This study therefore recommended among others the need to combine monetary and fiscal policy measures in order to stabilize prices and promote investment in the stock market.

JEL Classification: C32, E44, E52, G18

Keywords: fiscal policy, monetary policy, quality of governance, stock market

DOI: 10.7176/JESD/14-17-05

Publication date: November 30^th 2023