Abstract
This paper examined the response of foreign portfolio investment to Monetary Policy decisions of the Central Bank of Nigeria using monthly data spanning January 2007 to December 2018. The study adopted the Toda-Yamamoto Causality model and Generalized Impulse Response Function for analysis. The results showed that changes in monetary policy stance could only impact the behavior of foreign portfolio investment with 6-month lag and with marginal impact. This implies that monetary policy could still be effective even if the CBN decides to lose policy stance without losing significant capital flight. The conclusion from the findings is that monetary policy is just a signaling instrument for portfolio investors in Nigeria because it influences foreign portfolio investment through the Treasury bill rate rather than through MPR and CRR. The marginal response of investment due to changes in policy rate from the GIRF validate the TY results by indicating that monetary policy rate changes on its own may not be what investors are concern about, rather the expectation of the rates future path. The cash reserve ratio as a monetary policy tool does not seem to exert any impact on foreign portfolio investment.
Highlights
Portfolio Investment plays a key role in the economic life of any country
The study examines the response of foreign portfolio investment to monetary policy decision in Nigeria from January 2007 to December 2018
The study found no causality running from monetary policy rate (MPR) and Cash Reserve Ratio (CRR) innovations to foreign portfolio investment
Summary
Many countries rely on portfolio inflows to argument their demand for foreign exchange. These portfolio inflows as important as they are, depend on many factors, key among all, is the rate of interest operative in the attracting economy. The level of interest rates in every economy is determined by the monetary authority of that country through its monetary policy decisions. Monetary policy decisions through the manipulation of interest rate have a different implication for the general investment climate in an economy. A high-interest rate in the economy is attractive to foreign portfolio investors. If the aim of the monetary authority is to attract more foreign exchange, high interest would be considered as policy stance. Understanding the link between the interest rate and investment is, of great imperative to policymakers
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