Impact of Macroeconomic Policies on Stock Market in Mongolia

Abstract

According to the extensive literature, many factors affect the stock market by either direct way or indirect way. This study aims to investigate the adverse impacts of fiscal policy and monetary policies on stock market in Mongolia by using monthly data over the period January 2003 to December 2017 and applying a vector-autoregressive (VAR) model, with the predictions that fiscal crowding-out effect and too high policy rate would lower the stock price and stocks traded value. The empirical analysis in this study indicates that stock price and stocks traded value respond negatively to the shocks of policy rate and government securities traded value, respectively. In other words, the accumulated government debt and too high policy rate have crowded out the private investments in stock market and lowered the stock price by increasing riskiness of stocks or reducing the firms’ net worth, which is consistent with the main predictions of this study. Therefore, to enhance the contribution of stock market for sustainable economic growth, government and authorities need to engage in implementing macro prudent and sound economic policies from the long-term perspective. When government securities are considered as a fiscal policy tool, it is significant for government to reduce the accumulated government debt and obtain the normalization of domestic bond yield through improving tax-based financing rather than government debt financing. Regarding the monetary policy, it is crucial to obtain the benchmark policy rate among Asian economies with addressing significant factors affecting the high policy rate including macroeconomic condition, balance of payment, exchange rate fluctuations, financial intermediation, and deposit holders base.