MONETARY POLICY TRANSMISSION AND STOCK MARKET PERFORMANCE IN BANGLADESH: A VECTOR AUTOREGRESSION APPROACH

Abstract

This study examines the dynamic relationship between monetary policy instruments and stock market performance in Bangladesh using monthly data from January 2005 to December 2023. Employing the Vector Autoregression (VAR) framework, Augmented Dickey-Fuller (ADF) unit root tests, Granger causality tests, and impulse response function analysis, the study investigates how key monetary policy variables—repo rate, call money rate, inflation, and exchange rate—affect the Dhaka Stock Exchange General Index (DSEX). The empirical findings reveal that the repo rate exerts a statistically significant negative effect on stock market capitalization in the long-run equilibrium (β = –0.0577, p = 0.019), consistent with the discounted cash flow valuation mechanism. However, Granger causality tests indicate that monetary policy variables do not individually lead stock market movements in the short run, except for the exchange rate, which demonstrates significant predictive power (F = 4.1657, p = 0.0168). The impulse response analysis further confirms that exchange rate shocks generate persistent volatility in stock returns, whereas monetary policy rate shocks produce only transitory and muted effects. The study concludes that while Bangladesh's monetary authority possesses theoretical channels to influence capital markets, the transmission mechanism remains structurally weak due to market illiquidity, shallow institutional participation, and periodic regulatory discontinuities. JEL: E52, G10, G14, C32, O53