Interaction among stock prices and monetary variables in Pakistan Online publication date: Tue, 03-Mar-2015
by Ghulam Abbas; David G. McMillan
International Journal of Monetary Economics and Finance (IJMEF), Vol. 7, No. 1, 2014
Abstract: The interaction between stock market and monetary variables in Pakistan using monthly data for the last 20 years is examined. The Johansen co-integration approach is utilised to examine the equilibrium relationship between the stock price index, money supply, interest rates and a foreign exchange rate. An unrestricted VAR model is also used in order to analyse short-run dynamics and causality within these variables. The results report a long-run and significant relationship between these variables. In particular, the VAR model indicates that fluctuations in the KSE-100 index are significantly affected by the money supply and exchange rate but not the interest rate. Moreover, money supply has a positive relationship with the stock market and a negative relationship with interest rates and exchange rates. Interest rates have a weak and mixed relationship with all other variables. The dynamic relationships should aid policy-makers in understanding the effects of monetary policy changes.
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