Comparative Impact of Fiscal and Monetary Policies on Stock Market Performance in Nigeria

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Akinkuotu, Oluwayemisi
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University of Benin
This study empirically examined the effects of anticipated and unanticipated fiscal and monetary policies on the performance of the stock market. In addition, the study examined the relationship between these policies; whether they act as substitutes or complements in affecting stock market performance. The theoretical contention of Keynesian Economics that a mix of fiscal and monetary policy is the best in achieving macroeconomic objectives serves as the motivation for the study. The study has also been motivated by growing empirical evidence, which shows that the stock market plays an important role in enhancing economic growth. This is because the stock market has been recognized as an important sector of the macro economy, as it stands as a key component of financial system and performs crucial roles for the economic development of a country. However, if the stock market is to perform better, government policies need to be formulated and geared towards the better performance of the stock market. However, there has been no consensus both theoretically and empirically on the effect of government policies on stock market performance, and the relationship between fiscal and monetary policies in Nigeria. The study used quarterly time series data on Nigerian stock market over the period 2000 – 2012. The study proceeded by first testing for Stationarity and cointegration of the variables used in the estimation process, having specified the fiscal and monetary policies vector error correction models, for the first and second objective and the vector autoregressive model for the third objective. The values for the anticipated and unanticipated fiscal and monetary policies obtained thereof were then used in the estimation of a model specified to capture stock market performance, as measured by the value of transaction in the market. The empirical results obtained showed that both anticipated fiscal policy and monetary policy had a negative relationship with stock market performance in the long run. It was noticed that, anticipated monetary policy causes more variations in the performance of the stock market than the anticipated fiscal policy component. There exists unilateral relationship between anticipated fiscal and stock market performance, anticipated monetary policy and stock market, interest rate and stock market, stock market and exchange rate, anticipated fiscal policy and exchange rate and interest rate and exchange rate. However, unanticipated fiscal policy actions have a positive and not significant relationship with the stock market, whilst an unanticipated monetary policy action has a minimal positive and significant effect on the stock market. Unanticipated fiscal policy actions have very little impact in its contributions to the stock market, the unanticipated monetary policy also has little impact but it is of a lower magnitude compared to the unanticipated fiscal policy. On the other hand, both unanticipated fiscal and monetary policies did not have a unilateral or bilateral relationship with the stock market performance. Lastly, the study found that fiscal and monetary policies act as complements in their effect on the performance of the stock market. These findings suggest that policy makers need to exercise considerable caution regarding fiscal-monetary policy stance and stock market regulation in Nigeria.