Interaction between Monetary Policy and Stock Market Performance: Evidence from Selected Developing African Economies (1986- 2016)


Faculty: Management Sciences
Department: Banking And Finance


Izundu, G. O.
Ibenta, S. N.
Adigwe, P. K.


Monetary Policy actions should result to increase in Stock Market Performance but some findings from studies appear to disagree with this preposition. This study therefore examined the interaction between monetary policy and Stock Market Performance in Selected Developing African Economies from 1986 to 2016.The specific objectives of this study were to analyse the interaction between money supply (M2), consumer price index (CPI), deposit money bank total credit (TBC), foreign exchange rate (EX) and market capitalization (MC) in selected African developing economies. The study selected Nigeria, South Africa and Kenya as its sample. The study anchored on Tobin’s monetary theory and stock returns and used secondary data obtained from World Bank, International Monetary Fund, Bureau of Statistics, Knoema and the Central Bank of selected countries. The study used the Ordinary Least Square (OLS),Granger Causality test and Generalized Least Square (GLS) Panel Data Analysis techniques, to test the interaction between independent variables namely money supply (M2), consumer price index (CPI), deposit money bank total credit (TBC) and foreign exchange rate (EX) and dependent variable -market capitalization (MC) at the 5% level of significance. The findings amongst others showed that monetary policy had an insignificant relational effect on market capitalization in Nigeria, Kenya and South Africa; while the selected African developing economies’ pooled panel result indicated that Monetary policy variables used had both positive and negative significant relational effect on market capitalization. The study using granger causality test showed that market capitalization did not granger cause changes in the monetary policy variables and vice versa. Thus, the study concluded that monetary policy did not affect stock market performance but however have a relational relationship with market capitalization. Hence, recommended among others the implementation of market-friendly monetary policy to encourage increased investment in the economy and stock market; and reduce capital flight into foreign appreciating economy and stock market.