The Effects of Monetary and Fiscal Policies on the Stock Market in Malaysia

Wong, Ka Seng (2023) The Effects of Monetary and Fiscal Policies on the Stock Market in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

It is crucial for policymakers and investors to know the effects of changes in monetary and fiscal policies on the stock market. This can avoid stock market volatility and let investors to make more precise predictions of stock prices fluctuation and reduce the risk of losing money. The main objective of this paper is to examine the effects of monetary and fiscal policies on the Malaysian stock market in the long-run and short-run by using quarterly data from 1999:Q1 to 2020:Q4. This study used Kuala Lumpur Composite Index (KLCI) as the dependent variable. The independent variables that used in study are money supply, short-term interest rate, government total expenditures, government tax revenues, real effective exchange rate, and real gross domestic product. The Autoregressive Distributed Lag (ARDL) approach and Error Correction Model based on ARDL were used to examine the cointegration between the variables. The results showed that KLCI are significantly affected by monetary and fiscal policies. This study reveals that money supply, short-term interest rate, and government total expenditures have a negative relationship with KLCI in the long-run. Conversely, government tax revenues, real effective exchange rate, and real gross domestic product have a positive relationship with KLCI in the long-run. In addition, this study found that money supply, tax revenues, real effective exchange rate, and real gross domestic product have a negative relationship with KLCI in the short-run. On the other hand, the short-term interest rate and government total expenditures were found to positively related to KLCI in the short-run.