Comparative Impact of Fiscal and Monetary Policies on Stock Market Performance in Nigeria
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Date
2021-08-04
Authors
Akinkuotu, Oluwayemisi
Journal Title
Journal ISSN
Volume Title
Publisher
University of Benin
Abstract
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.