Navigating Ghana's economic waters: Exploring the impact of Fiscal and Monetary policies on stock market performance

Abstract

This study leverages the Autoregressive Distributed Lag (ARDL) and Exponential Generalized Conditional Heteroscedasticity (EGARCH) models to conduct a thorough examination of the impact of fiscal and monetary policies on the Ghanaian stock market from 1990 to 2022. Key findings indicate that government spending and tax revenue, as components of fiscal policy, are positively associated with stock returns, contrasting with the negative influence of the industrial production index. On the monetary policy front, interest rates are found to negatively affect stock performance, while exchange rates and the money supply exert positive influences. In the short term, government spending enhances stock returns, although the effects of GDP and the industrial production index are inconsistent, with exchange rates and money supply demonstrating a negative impact. The study underscores the profound sway that policy decisions have on stock market dynamics, underscoring an urgent need for investors and policymakers to closely monitor policy shifts and their market reverberations. A pivotal policy recommendation emerging from this research is the strategic synchronization of fiscal and monetary policies by policymakers to underpin stock market stability and growth. Such harmonization can counteract the adverse effects of policy-induced volatility, cultivating an investment-friendly climate. Investors and policymakers are encouraged to draw upon a spectrum of credible sources, encompassing financial news, governmental releases, and market analyses, to remain abreast of policy evolutions. This research offers precious perspectives on the nexus between economic policies and market movements, offering value for academic inquiry and informing practical decision-making strategies.