Effects of Monetary Policy on Stock Market Performance in Africa Evidence from Ten (10) African Countries from 1980 to 2019

Michael Asiedu,Emmanuel Owusu Oppong,Orazgylyjova Gulnabat

doi:10.4236/jfrm.2020.93014

Abstract

For a better insight and understanding of how monetary policy and the financial market in less developed countries such as those in Africa are interrelated; there is a need to also understand and appreciate the fundamentals of these economies and the associating imperfections within their financial systems due to the fact that they are less liberalized, relatively young, highly illiquid, logistically constrained among others. This study is a comprehensive analysis of the dynamics in stock market performance following changes in monetary aggregates in ten (10) selected African countries from 1993 to 2019. We adopted three stock market performance indicators; namely S & P global equity index, stock turnover and stock market capitalization as dependent variables and inflation, broad money growth, exchange rate, real interest rate and commercial bank and lender serving as independent variables. We then employed the random effect model based on our results from the Hausman test and VECM after co-integration was established among the variables. The study established the presence of a monetary transmission mechanism following changes in money supply. We found that growth in broad money positively affects the stock market performance through the interest rate channel. Interest rate and inflation recorded negative effects on stock market performance indices. We also found that changes in monetary policy are highly significant in stock market performance in the West African market due to the relatively high level financial openness in the countries under consideration.

Highlights

The set of policy actions and communications to achieve full employment, price stability and relatively low long-term interest rates are the key targets pursued by most central banks
We found that changes in monetary policy are highly significant in stock market performance in the West African market due to the relatively high level financial openness in the countries under consideration
This finding is consistent with the results of Suhaibu et al (2017) who found that monetary policy positively affects stock market performance in twelve (12) African countries using structural VAR model

Summary

Introduction

The set of policy actions and communications to achieve full employment, price stability and relatively low long-term interest rates are the key targets pursued by most central banks. Monetary policy actions can propel growth in the real sector of the economy given that, they are well channeled into the economy through all the transmission channels; the interest rate transmission channel, consumption transmission channel, and wealth effect transmission channel (Laopodis, 2013) This is with the general understanding that monetary policymakers can use their control and command over money market interest rate to effectively affect cost of capital and thereafter, spending on fixed investments, real estate, factory inventories and consumer goods. Such changes should lead to changes in aggregate demand and affect production levels (Bernanke & Gertler, 1995). There is less consensus about the degree to which monetary policy can impact the economy; this is because the very empirical research

Methods

Results

Conclusion