Monetary Policy and Stock Market Performance in Kenya: Linear ARDL Approach

Abstract

Purpose: This study examined the effects of monetary policy on stock market performance in Kenya, using monthly data spanning 2001–2024. Stock market performance was proxied by the NSE 20 Share Index, while monetary policy conditions were captured using money supply (M2), the 91-day Treasury Bill rate (TB91), and the exchange rate (FX).

Material/methods: A linear Autoregressive Distributed Lag (ARDL) model was applied to estimate both short-run and long-run relationships between monetary policy variables and the NSE 20 Share Index. The ARDL framework was adopted to simultaneously assess immediate dynamics and equilibrium (long-run) effects within a single modelling approach.

Findings: The results indicate that monetary policy exerts a statistically significant influence on stock market performance in Kenya. In the long run, money supply (M2) had a negative and statistically significant effect on the NSE 20 Share Index (β = −1.680, p < 0.001), suggesting that excessive liquidity expansion may generate inflationary pressures that weaken real equity returns. The 91-day Treasury Bill rate (TB91) also had a negative long-run effect (β = −0.141, p < 0.001), implying that rising short-term interest rates reduce equity attractiveness as investors reallocate toward safer interest-bearing instruments. Additionally, the exchange rate (FX) exhibited a strong negative long-run effect (β = −4.319, p < 0.001), indicating that depreciation of the Kenyan shilling undermines investor confidence and raises import-related costs, thereby depressing stock valuations. Overall, the evidence suggests that Kenya’s stock market is particularly sensitive to monetary policy shifts through liquidity, interest rate, and currency stability transmission channels.

Conclusion: The study concludes that a balanced and predictable monetary policy framework is essential for supporting stock market performance in Kenya. Specifically, stable exchange rate conditions, prudent control of money supply growth, and moderate interest rate adjustments are critical for maintaining investor confidence, sustaining capital market growth, and promoting financial stability.

Value: This study provides empirical evidence on the monetary-policy transmission mechanisms affecting stock market outcomes in Kenya over a long monthly sample (2001–2024). The findings offer practical guidance for policymakers and market stakeholders by highlighting the importance of liquidity management, interest rate calibration, and exchange rate stability in strengthening capital market performance and broader financial sector resilience.