Stock market and macroeconomic policies: The case of Mongolia

Taguchi, Hiroyuki (2018): Stock market and macroeconomic policies: The case of Mongolia.

Abstract

Mongolian stock market is underdeveloped compared with its banking credit market, due to a lot of impediment factors to prevent its development. This means Mongolian economy still has much room where its stock market development promotes the long-term financing and investment into non-mining sectors for sustainable economic growth. This paper aims to provide the evidence on the relationship between stock market and macroeconomic policies in Mongolia under the hypothesis that the recent biases of fiscal and monetary policies would distort her stock-price formation. The empirical analysis in this study found that the cumulative public debt and too high policy rate have stagnated the stock prices, through identifying the negative impulse responses of stock prices to the shocks of policy rate and government securities under a vector-autoregressive model estimation. The strategic policy implication for normalizing the stock prices could be the significance in ensuring budget consolidation and in addressing a fear of floating in monetary policy management in Mongolia.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock Market; Fiscal policy; Government Securities; Monetary Policy; Policy Rate; Vector auto-regression
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East

References

Arestis, P., P.O. Demetriades and K.B. Luintel (2001) “Financial Development and Economic Growth: The Role of Stock Markets” Journal of Money, Credit and Banking 33, 16-41.

Beck, T. and R. Levine (2004) “Stock Markets, Banks and Growth: Panel Evidence” Journal of Banking and Finance 28, 423–42.

Bhargava, A. (1986) “On the theory of testing for unit roots in observed time series” Review of Economic Studies 53, 369-384.

Calvo, G. and C. Reinhart (2002) “Fear of floating” The Quarterly Journal of Economics 117, 379-408.

Christiano, L., M. Eichenbaum and C. Evans (1999) “Monetary policy shocks: What have we learned and to what end” in Handbook of macroeconomics by J.B. Taylor and M. Woodford, Eds., Elsevier: New York.

Danaasuren, V. (2015) “Capital Market Development in Mongolia” The Northeast Asian Economic Review 3, 17-27.

El-Wassal, K.A. (2013) “The Development of Stock Markets: In Search of a Theory” International Journal of Economics and Financial Issues 3, 606-624.

Gill, I. and H. Kharas (2007) An East Asian Renaissance, IBRD and World Bank: Washington, D.C..

King, R. and R. Levine (1993) “Finance and Growth: Schumpeter Might Be Right” The Quarterly Journal of Economics 108, 717–37.

Levine, R. (2005) “Finance and Growth: Theory and Evidence” in Handbook of Economic Growth by P. Aghion and S. Durlauf, Eds., Elsevier: New York.

Levine, R. and S. Zervos (1998) “Stock Markets, Banks, and Economic Growth” The American Economic Review 88, 537-558.

Levine, R., N. Loayza and T. Beck (2000) “Finance and the Sources of Growth” Journal of Financial Economics 58, 261–300.

McKinnon, R. (1973). Money and Capital in Economic Development, The Brookings Institution: Washington.

Ng, S. and P. Perron (2001) “Lag length selection and the construction of unit root tests with good size and power” Econometrica 69, 1519-1554.

Phillips, P. and P. Perron (1988) “Testing for unit root in time series regression,” Biometrika 74, 335-346.

Rajan, R.G. and L. Zingales (1998) “Financial Dependence and Growth” American Economic Review 88, 559-586.

Sahay, R., M. Čihák, P. N’Diaye, A. Barajas, R. Bi, D. Ayala, Y. Gao, A. Kyobe, L. Nguyen, C. Saborowski, K. Svirydzenka, and S.R. Yousefi (2015) “Rethinking Financial Deepening: Stability and Growth in Emerging Markets” IMF Staff Discussion Note SDN/15/08.

Shaw, E. (1973) Financial Deepening in Economic Development, Oxford University Press: New York.

Svirydzenka, K. (2016) “Introducing a New Broad-based Index of Financial Development” IMF Working Paper WP/16/5.

Taguchi, H. and E. Khishigjargal (2018) “Monetary Policy Rule under Inflation Targeting in Mongolia” East Asian Economic Review 22, forthcoming.