Domestic and Global Monetary Policy Interactions with the Kuwaiti Stock Market: An Econometric Investigation

This study investigates the cointegration and causality relationships between Kuwaiti stock prices, domestic monetary aggregates (M0, M1, M2, M3), and the U.S. Federal Funds Rate, utilizing quarterly data from 2003 to 2023. The research identifies long-term and short-term dynamics among these variables through unit root tests, Engle-Granger and Johansen cointegration techniques, and Granger causality analysis. The findings reveal significant long-run equilibrium relationships between Kuwaiti stock prices and the broader monetary aggregates (M2 and M3), as well as the U.S. Federal Funds Rate, indicating that both domestic monetary conditions and global monetary policies are crucial drivers of stock market performance. The Granger causality results further indicate bidirectional causality between stock prices and broader monetary aggregates (M2, M3), while revealing unidirectional causality from M0 and the U.S. Federal Funds Rate to stock prices. This suggests that changes in the monetary base (M0) and U.S. interest rates significantly influence stock market movements in Kuwait, but not vice versa. These results have important implications for policymakers and investors, highlighting the need to consider both domestic and international monetary factors in decision-making processes.