An Empirical Analysis of Monetary Policies on Stock Price Distortion in Nigeria: Implications on Real Sector

Abstract

A market economy functions through competitive model where pricing is the control and indirect agent of economic development. Imperfect markets however result from various influences that are dominant enough to creating information asymmetry thereby causing unsystematic disequilibrium in pricing. Distortions are constructs of deliberate and undesirable influences that militate against expected price and negatively impact real sector development. This paper examines the origin of distortions in stock prices as it relates to inflation rates, interest rates, foreign exchange and monetary policy initiatives and its implications on the real sector in Nigeria using Granger causality, co-integration tests, ECM, impulse response function and variance decomposition techniques, which has not been specifically tested by prior research in this area. The empirical techniques were applied to explain the predictive power of macro-economic variables distortion from somewhat mismanaged policy initiatives. It is found that share price distortion is influenced by monetary policy initiatives, interest rate, inflation rate and foreign exchange rate; which dove-tails into irreversible low commitment of investments in the real sector.