Abstract:

Popular among scholarly works is the notion that short term capital inflow are self-crisis inflicting. As the need to amass sufficient capital to finance development initiatives for long run growth of developing nations across the world continuously arises, so is the fear of attracting foreign capital of short term nature owing to their perceived characteristic as widely believed. This study therefore, produces new evidence for Nigeria on the true nature of short term capital inflows by examining the effect of short term capital inflow on monetary system stability. The study employs the autoregressive distributed lags (ARDL) bounds testing approach to test the existence or otherwise of a long run relationship between the duo, and the cumulative sum (CUSUM) and cumulative sum of squares (CUSUM-sq) method to test for the overall stability of the model. Findings from the study reveal that the monetary system remained stable despite the negative impact of short term capital inflow (proxied by foreign portfolio investment, FPI). A key policy recommendation that emerged from the study is that the monetary authorities in Nigeria should focus on policies which are capable of ensuring the efficient and effective management of the exchange rate, pursue monetary stabilization measures, improve banking regulations and supervision and promote other capital control measures.