Response of Stock Market Development to Monetary Policy: A Tanzanian Stock Market Perspective

Abstract

This paper examines the response of stock market development to monetary policy in Tanzania using monthly time-series data for the period spanning from 2011 to 2020. The paper employs the autoregressive distributed lag (ARDL) to determine the response of stock market to monetary variables namely; money supply, inflation, exchange rate and interest rate. All the variables in the model are statistically different from zero. Based on these results, the paper shows that there is a negative response of stock market development to interest rate and inflation suggesting that an increase in interest rate or inflation will result in a decrease in domestic market development. Conversely, empirical results show that there is a positive response of domestic market development to changes in money supply or real exchange rate suggesting that an increase in money supply or the exchange rate will lead to an increase in domestic market capitalization. The implication of this paper is that investors and policymakers should take into account the changes of monetary variables before making stock investment or policy to stabilize the stock market performance, which implicitly has an impact on the overall economy.