The Role of Monetary Policy in Mitigating Financial Market Volatility in Nigeria

This study investigated the role of monetary policy in mitigating financial market volatility using monthly data from January 1990 to December 2022 and adopted the Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) model. The study categorized the financial market into the capital market and the money market. Utilizing the Johansen cointegration method, the study found a long-run relationship between the variables. Based on the EGARCH results, it was determined that monetary policy, represented by money supply and the monetary policy rate, has a negative correlation with the capital market and a positive correlation with the money market. These findings indicate that monetary policy does not mitigate volatility in the capital market but rather affects the money market. Furthermore, the study revealed that monetary policy can either increase or decrease financial market volatility. Consequently, the study recommends that monetary authorities exercise caution in the indiscriminate application of policy instruments, as substantial evidence suggests that the use of monetary policy tools significantly impacts the performance of financial markets.