The impact of fiscal and monetary policies on stock market performance in Kenya: an empirical analysis

Abstract

Motivated by growing theoretical and empirical evidence, which shows that stock markets playa vital role in boosting long-run economic growth, governments the world over have instituted measures aimed at enhancing stock market operations. However, if any stock market is to play its allocative role properly, alot more needs to be done on the macroeconomic policy framework front. Specifically, both fiscal and monetary policies formulation should be geared towards enhancing the efficacy with which resources are mobilized through the stock market. To this end, this study investigated the impact of fiscal and monetary policy actions on stock market performance in Kenya. It sought to answer the question on the nature and extent of the impact of monetary and fiscal policies on the performance of the NSE. It further sought to determine which specific components of these policies (anticipated or unanticipated), affect the NSE performance. The study proceeded by first testing for stationarity and cointegration of the variables used in the estimation process. Having specified the fiscal and monetary policies error correction models, it went on to determine the anticipated and unanticipated components of the same, by use of the general-tospecific model specification and reduction. The values for the anticipated and unanticipated fiscal and monetary policies attained thereof, were then used in the estimation of the stock market performance function, as measured by the stock price index. The empirical results attained showed that bothanticipated monetary policy actions, and unanticipated fiscal policy actions affect the stock market negatively, whilst unanticipated monetary policy adjustments affect it positively. Anticipated fiscal policy actions on the other hand, were found to have no impact on the stock market. .These findings suggest that policy makers need to exercise considerable caution regarding fiscal-monetary policy stance and stock market regulation in Kenya