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THE INFLOW OF FOREIGN PORTFOLIO INVESTMENT AND THE RESPONSE OF MONETARY POLICY IN NIGERIA

THE INFLOW OF FOREIGN PORTFOLIO INVESTMENT AND THE RESPONSE OF MONETARY POLICY IN NIGERIA

 

Abstract: The study investigated how foreign portfolio investment responds to monetary policy indicators and vice-versa in Nigeria. It employed high-frequency data for the period 2014:01-2016:12 and used the vector error correction (VEC) approach to investigate the inter-relationship among the endogenous series. It found that there is a uni-causal relationship between monetary policy indicators and FPI. The cointegration results affirmed that there exists a long-run relationship between FPI and treasury bill, while VEC estimates suggested that short-run relationship exists between FPI and MPR. The impulse response function suggested that inflow of FPI responds to monetary policy shocks and vice-versa. The variance decomposition results affirmed that innovations due to monetary policy and FPI constitute sources of variations in the fluctuations of these two variables. It was concluded that there exists a short-run relationship between monetary policy and foreign portfolio investment, but that there is no long-run relationship between the two variables. It was recommended that monetary policymakers should take into account the pattern of inflow of FPI into Nigeria, especially in the short-run when fixing the monetary policy rate.

JEL Classification: F34, E52, C22, C51

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