Impact of Fiscal and Monetary Policies on Stock Market Performance: An Empirical Study of Pakistan Stock Exchange

Abstract

The purpose of this study is to investigate the impact of fiscal and monetary policies on stock market performance along with the identification of moderating role of political stability in Pakistan. Data of Pakistani stock exchange for last 35 years (1981 to 2016) has been analyzed by applying multiple analytical methods. Stationary analysis has been performed through Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root tests. Confirmation of long run relationship has been done through Johansen co-integration analysis. The study has employed ordinary least square method (OLS) of Hierarchical regression analysis to analyze the nature of relationship. Error correction model has been used for analyzing short run relationship. Causal relationship has been tested through granger casualty test. The findings of research indicate the existence of long run relationship between both policies and stock market performance, while short run relationship exists only between monetary policy measures and stock market performance. Research also reveals that the Government expenditures, budget deficit and money supply reflect significant positive impact, while tax revenue and interest rate depict significant negative impact on stock market capitalization in the long run. Further, political stability moderates only the relationship between interest rate and stock market capitalization, while other relationships are not moderated by political stability.