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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.

Foreign Portfolio Investment Response to Monetary Policy Decisions in Nigeria: A Toda-Yamamoto Approach