The relationship between stock market return and monetary policy decisions in Kenya.

Abstract

This study sought to examine the relationship between stock market returns and monetary policy stance in Kenya using time series data for the period 2003 to 2013. The study employed the ordinary least square method and conducted appropriate diagnostic test to ensure validity of the findings. Estimated results showed that money supply multiplier has a positive and significant influence on stock market returns. The results revealed that treasury bills rate, cash reserve requirement and Repo rate as indicators of monetary policy do not significantly influence Kenyan stock market returns. An important policy implication of this research paper is that government through the monetary authorities in the country (CBK) can enhance the wealth of investors in the stocks market by influencing the money supply multiplier which positively and significantly influences stock market returns. This can be achieved if the monetary policy committee focuses on the money channel of monetary policy transmission which assumes that changes in reserve money are transmitted to broad money though the money multiplier. The emphasis should be on the use of reserve money as the operating target and broad money as the intermediate target in monetary policy implementation process if the government to achieve policy goals of output and financial stability. Broad money (M2) and reserve money should be seen as important policy instruments of promoting stock market growth in the country.