RESPONSE OF STOCK MARKET DEVELOPMENT TO MONETARY POLICY:

Abstract

This paper examines the response of stock market development to monetary policy in Tanzania using monthly time-series data for the period spanning from 2011 to 2020. The paper employs the autoregressive distributed lag (ARDL). All the variables in the model are statistically significant at a 5 percent level of significance. Based on the results, the paper suggests there is a negative response of stock market capitalisations on interest rate and inflations rate suggesting that a 1 percent increase in inflations rate and interest rate will result in a percent decrease in domestic market capitalisations. However, the results also show there is a positive response of domestic market capitalisations on money “supply and exchange rate suggesting that a 1 percent increase in money supply and the exchange rate will result in a percent increase in domestic market capitalisations. Thus, an increase in monetary policy through the money supply and exchange rates and decrease in monetary through inflations rate and real interest rate will lead to an increase in stock market capitalisations in Tanzania.”