The response of the Ghana stock exchange composite-index to domestic and foreign monetary policy shocks

Abstract

The marked volatility of the Ghana Stock Exchange (GSE) during some periods have prompted an in-depth study to analyze how the monetary policy functions such as the foreign interest rate, the real GDP growth rate, the real inflation rate, the domestic interest rate, the rate of growth in money supply and the exchange rate impact on stock market performances in Ghana. This study utilizes a structural vector-autoregressive (SVAR) econometric model by which the impulse response functions (IRF) and the forecast error variance decomposition (FEVD) are used to analyse the relationship of the variables to changes in the GSE-CI value. In line with economic theory, a contractionary foreign and domestic monetary policy shocks cause the Ghana Stock Exchange Composite Index (GSE-CI) to decline. From the study, we found out that the foreign monetary policy innovations in response to the 2007 financial crisis have little impact on the Ghana interest rate and as such accounts for a very small percentage of the fluctuations to the Ghana Stock Exchange Index. During the QE, the monetary policy innovations (the shocks to the foreign and domestic interest rate) increased slightly in explaining the variations to the GSE-CI. Finally, the exchange rate responds significantly to a contemporaneous shocks to the ineterst rate to affect the GSE-CI. Thus, a shock to the domestic interest rate has the capacity to reorient the exchange rate of the Ghanaian economy. Thus, domestic interest rate shocks through its operations with the exchange rates will significantly impact on the performance of the Ghana Stock Exchange.