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

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.