The Effect of Stock Prices on Demand for Money: The Case of Kenya
Abstract
This study sought to investigate empirically the effect of stock market prices on thelong-run demand for real money balances in Kenya. Modern time series econometric
methods of co-integration and error correction modelling (ECM) were used to fit
quarterly time series data for the period 1996:I €“2011:II. The analysis established the
existence of a positive effect of stock market prices on the demand for real money
balances in Kenya during the sample period. Among others, the findings suggested the
wealth effect from stock prices dominated the substitution effect in demand for money
in Kenya during the sample period. The arising monetary policy implication is one:
control for the wealth effect from stock market was important for stable money demand
function that would make monetary policy effective in Kenya. Nevertheless, more
research is required, including also on the effect of money supply on stock prices.
Keywords: Stock market, demand for money, wealth effect, income effect, co-integration,
Kenya
References
Adam, C.S. 1992. Recent Developments in Econometric Methods: an Application to the Demand for Money in Kenya. African Economic Research Consortium, Special Paper 15.
Arowolo, E.A. 1971. The Development of Capital Markets in Africa with Particular Reference to Kenya and Nigeria. IMF Staff Papers, 18(2): 420 €“469.
Bencivenga, V. R., B.D. Smith & R.M. Starr. 1996. Equity Markets, Transaction Costs, and Capital Accumulation: an Illustration. World Bank Economic Review, 10(2): 371 €“396.
Bitrus, Y.P. 2011. The Demand for Money in Nigeria. European Journal of Business and Management, 3(6): 63 €“85.
Boyle, G.W. 1990. Money Demand and the Stock Market in A General Equilibrium Model with Variable Velocity. Journal of Political Economy, 98(5), Part 1: 1039 €“1053.
Caruso, M. 2006. Stock Market Fluctuations and Money Demand in Italy 1913 €“2003.
BANCA D ' ITALIA Working Paper No. 576.
Darrat, A.F. 1985. The Demand for Money in a Developing Economy: the Case of Kenya.
World Development, 13: 1168 €“1170.
De Bondt, G.J. 2009. Euro Area Money Demand: Empirical Evidence on the Role of Equity and Labour Markets. European Central Bank, Working Paper Series No. 1086.20
Joseph K. Mwanzia, Michael O. A. Ndanshau & Eliab Luvanda
Demirgüç-Kunt, A. & R. Levine. 1996. Stock Markets, Corporate Finance, and Economic
Growth: an Overview. World Bank Economic Review, 10(2): 223 €“239.
Diu, N.H. & W.D. Pfau. 2010. The Determinants and Stability of Real Money Demand in
Vietnam, 1999 €“2009. GRIPS Policy Research Centre, Discussion Paper 10 €“14.
Friedman, M. 1988. Money and the Stock Market. Journal of Political Economy, 96(2):
€“245.
Hye, Q.M.A, S.K.A Wasti, N. Khatoon & K. Imran. 2009. Relationship Between Stock Prices, Exchange Rate and Demand for Money in Pakistan. Middle Eastern Finance and Economics, No 3: 89 €“96.
Kamau, A. & N.S. Ndung ' u. 2003. Financial Innovation and Demand for Money in Kenya.
Kenya Institute for Public Policy Research and Analysis, Discussion Paper, January.
Karim, M.Z.A. & T.B. Guan. 2004. Stock Prices, Foreign Opportunity Cost, and Money Demand in Malaysia: A Cointegration and Error Correction Model Approach. Journal Ekonomi Malaysia, 38: 29 €“62.
Kemboi, J.K. & D.K. Tarus. 2012. Macroeconomic Determinants of Stock Market Development in Emerging Markets: Evidence From Kenya. Research Journal of Finance and Accounting, 3(5): 57 €“68.
Kinuthia, I.K. and M.N. Etyang (2014). Stock Market Liberalization, Stock Market Performance and Economic Growth in Kenya. International Journal of Economics and Finance, 6(4):196-209.
Kulundu, J.O. (2013). Impact of Stock Market Development on Economic Growth in Kenya 1970-2010. MA (Economics), University of Dar Es Salaam.
Laidler, D.E.W. (1993), "The Demand for Money: Theories and Evidence. 4 th Edition, New York: Harper and Row.
Levine, R. & S. Zervos. 1998. Stock Markets, Banks, and Economic Growth. America Economic Review, 88(3): 537 €“58.
Leys, C. 1975. Underdevelopment in Kenya; the Political Economy of Neo-Colonialism. James Currey and University of California Press.
Levine, R. & S. Zervos. 1996. Stock Markets Development and Long-Run Growth. World Bank Economic Review, 10(2): 323 €“340.
Majid, M.S.A., M.N. Azis & H. Harmen. 2007. Does Stock Prices Co-Integrate with Money Demand Function in the Indonesian Economy? Evidence From the Post-1997 Asian Financial Crisis. Thammasat Economic Journal, 25(3): 142 €“160.
Mccornac, D.C. 1991. Money and the Level of Stock Market Prices: Evidence From Japan" Quarterly Journal of Business and Economics, 30(4): 42 €“54.
Misati, R.N., L. Njoroge, A. Kamau & S. Ouma. 2010. Financial Innovation and Monetary Policy Transmission in Kenya. International Research Journal of Finance and Economics, 50: 123 €“136.
Mundell, R.A. 1963. Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates. The Canadian Journal of Economics and Political Science, 29(4): 475 €“485.The Effect of Stock Prices on Demand for Money
Mwanzia, J.K. 2013. The Effect of Stock Prices on Money Demand: A Case Study in Kenya. MA (Economics) Dissertation, University of Dar Es Salaam.
Ndanshau, M.O.A. & A.A.L. Kilindo. 2016. Interest Rates and Financial Savings in Tanzania: 1967 €“ 2010. Journal of Social and Economic Policy, No. 13(1):25-46
Ndele, S.M. 1991. The Effects of Non-Bank Financial Intermediaries on Demand for Money in Kenya. AERC Research Paper No. 5.
Ngugi, R. & R. Njiru. 2005. Growth of Nairobi Stock Exchange Primary Market." Discussion Paper No. 47, KIPPRA, Nairobi, Kenya.
Ngugi, R.W. 2003a. Development of the Nairobi Stock Exchange: A Historical Perspective. KIPPRA (Kenya Institute for Public Policy Research and Analysis. Discussion Paper No. 27, March.
Ngugi, R. W. 2003b. What Defines Liquidity of the Stock Market? the Case of Nairobi Stock Exchange. Kenya Institute for Public Policy Research and Analysis (KIPPRA) Discussion Paper No. 29, Nairobi.
Ngugi, R.W. & J.W. Kabubo. 1998. Financial Sector Reforms and Interest Rate
Liberalization: the Kenya Experience. African Economic Research Consortium, Research Paper 72.
Nyang ' oro, O. 2013. Foreign Portfolio Flows and Stock Market Performance in Kenya: Case of Nairobi Securities Exchange. Seminar Paper, School of Economics, University of Nairobi, Mimeo.
Nyasha, S. & N.M. Odhiambo. 2014. The Dynamics of Stock Market Development in Kenya. The Journal of Applied Business Research, 30(1): 73 €“82.
Padhan, P.C. 2011. Stability of Demand for Money in India: Evidence From Monetary and Liquidity Aggregates. International Journal of Economics and Finance, 3(1): 271 €“282.
Parkinson, J.N. 1984. The Nairobi Stock Exchange in the Context of Development of Kenya. Savings and Development, VIII(4): 363 €“372.
Pathak, D.S. 1981. Demand for Money in Developing Kenya: an Econometric Study, 1968 €“1978. Indian Economic Journal, 29: 10 €“16.
Rutayisire, M.J. 2010. Economic Liberalization, Monetary Policy, and Money Demand in Rwanda: 1980 €“2005. African Economic Research Consortium, Research Paper 193.
Sahadudheen, I. 2011. Demand for Money and Exchange Rate: Evidence for Wealth Effect in India. Undergraduate Economic Review, 8, Issue 1, Article 15.
Sichei, M.M. & A.W. Kamau. 2012. Demand for Money: Implications for the Conduct of Monetary Policy in Kenya. International Journal of Economics and Finance, 4(8): 72 €“82.
Sriram, S.S. 2001. A Survey of Recent Empirical Money Demand Studies. International Monetary Fund Staff Papers, 47(3): 334 €“365.
Tsheole, T. 2006. The Demand for Broad Money (M2) in Botswana. Masters of Commerce Thesis, Rhodes University.
Yartey, C.A. & C.K. Adjasi. 2007. Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges. IMF Working Paper, WP/07/209.
