The Effect of Stock Prices on Demand for Money: The Case of Kenya

Authors

  • Joseph K Mwanzia Ministry of Finance
  • Michael O. A Ndanshau University of Dar es Salaam
  • Eliab Luvanda University of Dar es Salaam

Keywords:

Stock market, demand for money, wealth effect, income effect, co-integration, Kenya

Abstract

This study sought to investigate empirically the effect of stock market prices on the long-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.

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Author Biographies

Joseph K Mwanzia, Ministry of Finance

Ministry of Finance, Republic of Kenya

Michael O. A Ndanshau, University of Dar es Salaam

Department of Economics, University of Dar es Salaam.

Emails: ndanshau@udsm.ac.tz and michaelndanshau@gmail.com.

 

Eliab Luvanda, University of Dar es Salaam

Department of Economics, University of Dar es Salaam.

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Published

2015-12-31

How to Cite

Mwanzia, J., Ndanshau, M., & Luvanda, E. (2015). The Effect of Stock Prices on Demand for Money: The Case of Kenya. Tanzanian Economic Review, 5(1-2), 1-21. Retrieved from https://ter.udsm.ac.tz/index.php/ter/article/view/19