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The Influence of Monetary and Fiscal Policies on the Capital Market: A Vector Autoregressive (VAR) Model

Journal of Administrative and Economics Science

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Title The Influence of Monetary and Fiscal Policies on the Capital Market: A Vector Autoregressive (VAR) Model
 
Creator Al-Shiab, Mohammad Salam
 
Description The study investigates the influence of the Jordanian monetary and fiscal policies on Amman Stock Exchange (ASE) performance using the Vector Autoregressive (VAR) approach. Market capitalization (MC), money supply (M1), and government expenditure (GE) were used  as  proxies  for  ASE  performance, monetary  policy,  and  fiscal  policy,  respectively.  The  analysis  was  undertaken  with  annual  data spanning over  twenty-seven years  in  logarithms form 1978  till 2004. Moreover, Dickey-Fuller and Johansen Cointegartion tests have been applied  for  testing  stationarity  and whether  the  variables  have  long  relationship. Empirical  results  are  consistent with  previous  literature, especially those related to emerging markets. The results show that these variables were not stationary in their levels and do not have long relationships. However,  the second difference  for MC and  the  first difference  for GE and M1 were stationary. In addition,  two main  tools were used to investigate whether the variables have short-term relationships, namely impulse response analysis, and variance decomposition tests.  For  confirming  the  argument  concerning  the  direction  of  the  relationships  among  variables,  Granger  causality  test  was  applied. Variance decomposition  results  showed  that MC  significantly  influenced by M1 whereas GE had much  less  influence,  since M1 and GE explain was 11% and 3%, respectively of the forecast error variance of MC. In addition, results show that stock market is responding to its own shocks since MC explained 87% of its forecast error variance in a ten-years period. The impulse response test shows that any shock to the M1 had a significant effect on the MC after almost two years, whereas GE shock had a marginal effect on the MC after three years. The response of the MC to its own-shocks was highly significant. Granger causality test showed that M1 has a significant effect on MC, while GE was not.  Key Words: Capital Market, Market Capitalization, Monetary Policy, Fiscal Policy, VAR.
 
Publisher Qassim University Academic Publishing and translation
 
Contributor —
 
Date 2008-04-03
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
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Format application/pdf
 
Identifier http://publications.qu.edu.sa/ojs/index.php/economic/article/view/121
 
Source Journal Of Administrative And Economics Science; Vol 1, No 2
 
Language eng
 
Relation http://publications.qu.edu.sa/ojs/index.php/economic/article/view/121/118