IMPACT OF MONETARY AND FISCAL POLICY ON THE CAPITAL MARKET PERFORMANCE

(Banking and Finance)
IMPACT OF MONETARY AND FISCAL POLICY ON THE CAPITAL MARKET PERFORMANCE 
ABSTRACT

This study examined the impact of monetary and fiscal policy on the capital market performance. In light of the empirical review and other discussions, a number of questions arose as to whether there is relationship between broad money supply, private sector credit, government expenditure, taxation and capital market performance. Using the Ordinary Least Square (OLS) regression technique with the aid of computer software, the empirical findings revealed among other things that there is a positive relationship between broad money supply and capital market performance and that, government expenditures (GEXP) does not significantly affect stock market performance in Nigeria. We recommend that, since Monetary Policy affects Nigeria Stock market positively whereas fiscal policy has no significant impact on the Nigerian Stock Market, a bias for Monetary Policy as a measure of Economic Growth is inevitable in Nigeria and since government spending does not influence Capital Market development in Nigeria. The researcher therefore suggests that the growing government expenditures in the unproductive sectors of the economy must be stemmed if Nigeria’s financial system will be developed.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study                        
Statement of Research Problem                    
Objectives of the Study                         
Research Hypotheses                                 
Scope of the Study                                 
Significance of the Study                        
References                                
CHAPTER TWO: LITERATURE REVIEW
Introduction                                 
Monetary Policy: Conceptual Framework                     
Theoretical/Analytical Perspectives on Monetary Policy             
An Appraisal of Monetary Policy in Nigeria                    
Monetary and Fiscal Policies Prior to SAP                    
SAP, Monetary and Fiscal Policies and Economic Development                                                                                                                                                                                                
Review of Empirical Literature on the Development of Capital Market     
Contribution of the Capital Market to Socio-Economic Development of
Nigeria                                        
Performance of the Nigerian Capital Market                    
Problems of the Nigerian Capital Market                 
Capital Market Reforms                            
References                                 
CHAPTER THREE: RESEARCH METHODOLOGY
Introduction                                     
The Research Design                                
Sources of Data Collection                            
Model Specification                                 
Method of Data Analysis                        
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
Data Presentation and Analysis                        
CHAPTER FIVE:    SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Introduction                                     
Summary of Findings                            
Recommendations                            
Conclusion                                     
Bibliography                                     
Appendix                                     
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. This is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy, and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy (Alile 1984).
It helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth (Alile 1997). Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The capital market provides a means through which this is made possible. However, the paucity of long-term capital has posed the greatest predicament to economic development in most African countries including Nigeria.
Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long-term growth capital formation. It is crucial in the mobilization of savings and channeling of such savings to profitable self-liquidating investment.
The Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy. The functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu 1998). Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun 2005).
Okereke-Onyiuke (2000) posits that the cheap source of funds from the capital market remain a critical element in the sustainable development of the economy. She enumerated the advantages of capital market financing to include short repayment period as funds are held for medium and long term period or in perpetuity, funds to state and local government without pressures and ample time to repay loans.
The legal backing for monetary policy in Nigeria derives from the various statutes such as the Central Bank of Nigeria Act of 1958 as amended in Central Bank of Nigeria Decree No.24 of 1991, Central Bank of Nigeria Decree 1993 (as amended till date).
According to Ekpo (2003), a key function of all central banks including the Central Bank of Nigeria is to promote and maintain monetary stability and a sound financial system. The assumption is that this will help encourage long term planning, and infrastructural development, attract foreign investments and engender economic growth. While the Central Bank is totally responsible or the promulgation of sound monetary policies in order to aid the attainment of the above objectives, the formulation of fiscal policies, which also affects the achievement of the above objectives, however falls on the wider government, particularly the Ministry of Finance.
Okonjo-Iweala, (2003) asserted that, both monetary and fiscal policies impact on economic growth and development; hence, it is not surprising that they are entwined. This relationship has been explicitly explained thus: fiscal and monetary policies are inextricably linked in macroeconomic management; developments in one sector directly affect developments in the other. She added that, fiscal policy is central to the health of any economy, as government’s power to tax and to spend affects the disposable income of citizens and corporations, as well as the general business climate. In this regard, the interrelationship between public spending and private sector performance is of paramount importance. On one hand, Government expenditure can provide an impulse for private sector growth, while on the other, it can be harmful if it results in budget deficits and leads to competition for scarce financial resources from the banking sector as the government seeks to finance the deficit. In such circumstances, the crowding out of the private sector by the government sector can outweigh any short – term benefits of an expansionary fiscal policy. The key to all theses therefore lies in striking a good balance in fiscal management. [having] enough expenditure outlays to meet the needs of government and support growth, but not so much as to deny the private sector the resources it needs to invest and develop.
Goodhart, (1991) buttress that, government fiscal recklessness resulting in deficit financing can also cause inflation, which contradicts the fundamental monetary policy objective of price stability. This has the potentials of destabilizing the macro economic environment thereby retarding economic productivity and development.
Ogbole, (2010) lamented that, in spite of many, and frequently changing in fiscal, monetary and other macro-economic policies, Nigeria has not been able to harness her economic potentials for rapid economic development. These policies span through two broad periods, which can be classified as “regulation” and “deregulation”.
In the light of this, the researcher intends to empirically examine the impact of monetary and fiscal policy on the capital market performance.
STATEMENT OF RESEARCH PROBLEM
Fiscal and monetary policy is known to be a vital instrument that a country can deploy for the maintenance of domestic price and exchange rate stability as a critical condition for the achievement of a sustainable economic growth and external viability.
Its role in ensuring an overall macroeconomic stability cannot be overemphasized. Although in Nigeria appreciable progress has been made in this regard since the introduction of various financial sector reform programs in 1986. Despite the fore going, the Nigerian fiscal and monetary policies have continued to face several challenges. No wonder, the CBN is increasingly focusing more on the aspect of price stability, recognizing the relevance of macroeconomic stability for economic sustainable output and employment growth.
Against this backdrop, the following research questions are raised:
Is there significant relationship between broad money supply in Nigeria and capital market performance?
Is there significant relationship between private sector credit and capital market performance?
Is there significant relationship between government expenditure and capital market performance?
Is there significant relationship between government revenue from taxation and capital market performance?
OBJECTIVES OF THE STUDY
The broad objective of this study is to examine the impact of monetary and fiscal policy on the capital market performance.
The specific objectives are:
To determine the relationship between broad money supply in Nigeria and capital market performance.
To examine the relationship between exchange rate and capital market performance.
To examine the relationship between private sector credit and capital market performance.
To determine the relationship between government revenue from taxation and capital market performance.
RESEARCH HYPOTHESES
The hypotheses formulated for this study are:
There is a significant relationship between broad money supply in Nigeria and capital market performance.
There is a significant relationship between private sector credit and capital market performance.
There is a significant relationship between government expenditure from taxation and capital market performance.
There is a significant relationship between government revenue from taxation and capital market performance.
SCOPE OF THE STUDY
It is well known fact around the globe that, there is no limitation to knowledge. As a result of the above fact, the scope of this research will be limited to the Nigerian economy vis-à-vis the impact of fiscal and monetary policy on the capital market performance.
In term of time series, a period of 25 years is used i.e. 1985 to 2010 using some market indicators (such as stock price) as means of assessing the impact of fiscal and monetary policy on the capital market performance.
SIGNIFICANCE OF THE STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the monetary and fiscal policy on the capital market performance. The study would also facilitate the examination of the effects of monetary and fiscal policy on the capital market performance and thus boosting the empirical evidence from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected variables examined in the study.
The result of the study would be of benefits to investment analysts, investors and corporations in examining the effectiveness of monetary and fiscal policy on the capital market.  
It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economies like Nigeria. Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study.   
 REFERENCES
Alile H. I. (1984), The Nigerian Stock Exchange: Historical Perspectives, Operations and Contributions to Economic Development, Central Bank of Nigerian Bullion, 2: 65-69.
Alile H. I. (1997), Government must divest. The Business Concord December 2, P. 8
Anyanwu J. C. (1993), Monetary Economics Theory, Policy and Institutions. Onitsha: Hybrid Publishers Ltd., pp. 247 – 274.
Anyanwu J. C., Oyefusi S. A., Oaikhenan H, Dimowo F. A. (1997), Structure of the Nigerian Economy (1960 –1997). Onitsha: JOANEE Educational Publishers Ltd., P. 453.
Anyanwu JC 1998. Stock Market Development and Nigerian Economic Growth, Nigerian Financial Review, 7(2): 6-13.
Ekundayo IK 2002. Creating a conducive Environment for Investment in the Nigerian Capital Market. Paper Presented at Public Enlightenment on Opportunities in the Capital Market for industrial Development of Kogi stat ‘ Lokoja 29th March to1st April, 2002.

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