EFFECTS OF MONETARY POLICY ON STOCK MARKET PERFORMANCE IN MALAWI

Abstract

This study provides empirical evidence on the existence of a long run equilibrium relationship between the effects of monetary policy on stock market performance in Malawi using the ARDL bounds testing approach to cointegration. The study uses monthly data for the period November, 1996 to April, 2012. The study reveals that in the short run it is the lagged values of money supply, exchange rate, treasury bills yields and of stock returns that play a dominant role in influencing the short-term volatility of returns on the Malawi Stock Exchange. The study also establishes that the bank rate and treasury bills yields influence stock returns in the long run. The study concludes that the conduct of monetary policy in Malawi affects the stock market. It also establishes that monetary policy reacts as “firefighting device” to the developments on the fiscal front, which reflects orientation of political regimes. Instead of supporting effective fiscal policies that enhance economic growth and stimulate investment, monetary policy in Malawi during the period of this study endeavored to correct the problems created by ineffective fiscal policy conduct.