Impact of Monetary Policy on Stock Prices

The objective of this research paper is to analyze the impact of monetary policy on stock prices in Pakistan. For this purpose, time series data of 37 years from 1980 to 2019 was taken from the website of Pakistan Stock Exchange. The dependent variable was stock market capitalization while independent variables were: Money supply, GDP, Inflation and interest rate. The authors applied different econometric techniques to determine nature of relationship between independent and dependent variables. The findings of the study reveal that money supply; GDP have positive while CPI has negative relationship with stock prices. It was noted that unpredictable decisions of monetary authorities make the behavior of market participants irrational in Pakistan because they take decisions in haphazardly and suffer losses. It is suggested that Monetary authorities should take decision in credible way to avoid confusion.