DOES MONETARY POLICY INFLUENCE STOCK MARKET LIQUIDITY IN PAKISTAN? AN ARDL BOUND TESTING APPROACH

Abstract

This current study has examined the relationship between monetary policy and market liquidity for Pakistani equity market from 2000 to 2021 by using monthly data. Broad money (M2) and interest rate (treasury bills rate) are utilized to capture the effects of monetary policy, value traded is used as a proxy for market liquidity and foreign portfolio investment (FPI), the index of industrial production (IIP), exchange rate (EX) are used as independent variables.  All variables are taken in log form to make them unit free. The Auto Regressive Distributed lag approach is adopted to assess the short run and long run causal relationship. In the long run, the findings of the study show that broad money and exchange rate have insignificant while foreign Portfolio Investment and Ttreasury Bill Rate have negative and significant impacts in the long run. In the short run, stock market liquidity has significant and negative association with Treasury bill rate, foreign portfolio investment and exchange rate.  The results indicate that high interest rates discourage the foreign portfolio investment. Monetary policy committee should decrease the interest rate that will increase stock market’s liquidity.

Key words: Monetary Policy, Liquidity, Treasury Bill Rate, Industrial Production Index, Foreign Portfolio Investment, Exchange Rate

JEL Code: B26, D53, E44, F38, G17, P34