FISCAL POLICY AND STOCK PERFORMANCE AT THE NAIROBI SECURITIES EXCHANGE: A LONG-SHORT RUN APPROACH
Abstract
This study examines the influence of fiscal policy on stock market performance in Kenya using monthly time-series data spanning from January 2001 to December 2024. Specifically, the study links key fiscal variables (tax revenue and public debt) to movements in the Nairobi Securities Exchange 20 Share Index, which serves as a proxy for overall market performance. Anchored on Keynesian theory, the New Keynesian framework, and the Fiscal Theory of the Price Level (FTPL), the study employs a linear Autoregressive Distributed Lag (ARDL) model to capture both short-run and long-run dynamics between fiscal policy and stock market outcomes. The findings reveal that public debt and tax revenue exert a statistically significant influence on stock market performance in the long run, while both variables are insignificant in the short run, confirming that fiscal policy operates through gradual adjustment mechanisms rather than immediate effects. The results further show that government borrowing, when directed toward productive investments, can stimulate economic activity and enhance investor confidence, while effective revenue mobilization signals fiscal strength, improved public service delivery, and macroeconomic stability. These findings underscore that fiscal policy is a critical determinant of stock market performance in Kenya, particularly over extended periods. From a practical perspective, the study highlights the importance for financial managers, investors, and listed firms to adopt a long-term orientation when responding to fiscal policy changes, including closely monitoring government borrowing trends and integrating fiscal expectations into capital budgeting, risk management, and investment decisions. From a policy standpoint, the results emphasize the need for fiscal authorities to design and implement sustainable, transparent, and growth-oriented policies that foster investor confidence and support stable capital market development.
Keywords: Fiscal Policy, Stock Market Performance, Tax Revenue, Public Debt, Nairobi Securities Exchange 20 Share Index
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