The Impact of Inflation and Exchange Rate on Stock Market Returns in Tanzania

Abstract

The influence of exchange rate and inflation on stock market returns in Tanzania was investigated using monthly inflation and exchange rate data from the BOT and NBS, as well as monthly market returns from the DSE, over the period 2011 to 2020. This effect was investigated using the autoregressive distributed lag (ARDL), cointegration approach, and the error correction parameterization of the ARDL model. The results from the analysis show that in both the short-run and long-run, stock market return is impacted by inflations rate and exchange rate. Moreover, the empirical results demonstrate the significant negative impact of inflations rate and exchange rate in long run on stock market return while there is positive impact between stock market return and exchange rate and inflation at short run on the basis of the above analysis it can be conclude that two selected macroeconomic variables are relatively significant and likely to impact stock market return of the Dar es salaam stock exchange basing on their coefficients and their significance relationship both in short and long run impacts of which its consistence with theories .The outcome of this thesis discovered potential need to focus on impact of macroeconomic variables in designing monetary and fiscal policy of the country’s economy, since; the capital market does respond quickly to the arrival of new information.