Theoretical Economics Letters, 2016, 6, 1186-1195 http://www.scirp.org/journal/tel ISSN Online: 2162-2086 ISSN Print: 2162-2078 DOI: 10.4236/tel.2016.65112 October 21, 2016 Monetary Policy Impact on Stock Return: Evidence from Growing Stock Markets Raksha Bissoon, Boopen Seetanah, Reena Bhattu-Babajee, Narvada Gopy-Ramdhany * , Keshav Seetah University of Mauritius, Moka, Mauritius Abstract This study investigates the impact of monetary policies on stock markets based on a sample of five open countries with growing stock market over the period 2004 to 2014. Using a random effect model for the panel regression coupled with a panel vector error correction model to study the short term and long term relationship between the variables, the findings reveal a negative relation between interest rate and stock return and a direct link between money supply and stock return. The re- sults confirm that both in the short run and long run monetary variables explain changes in stock return. Keywords Monetary Policy, Rate of Interest, Money Supply, Stock Return 1. Introduction Financial markets and more specifically stock markets are considered as being highly sensitive to changes occurring in the economy. Monetary policies are usually underta- ken to restore or maintain stability within an economy and such policies can either be expansive or restrictive with Central banks using interest rates and money supply as monetary policy instruments. Stock valuation is done by using the future cashflows as- sociated with the stocks and discounting at the appropriate interest rate, which is esti- mated by considering the general level of interest rates prevailing in an economy. Dur- ing expansive period, stock prices should normally be higher, given that the interest rates at which cashflows are discounted will be lower and also there should be a boost in economic activity. A restrictive period means higher interest rates and lower future economic activity, entailing lower stock prices. The quantity theory of money formalizes the link relating money supply and stock prices. When there is an increase in money supply, there will be a surplus in the quan- How to cite this paper: Bissoon, R., Seeta- nah, B., Bhattu-Babajee, R., Gopy-Ramdhany, N. and Seetah, K. (2016) Monetary Policy Impact on Stock Return: Evidence from Growing Stock Markets. Theoretical Eco- nomics Letters, 6, 1186-1195. http://dx.doi.org/10.4236/tel.2016.65112 Received: September 2, 2016 Accepted: October 19, 2016 Published: October 21, 2016 Copyright © 2016 by authors and Scientific Research Publishing Inc. This work is licensed under the Creative Commons Attribution International License (CC BY 4.0). http://creativecommons.org/licenses/by/4.0/ Open Access