Impact of Fiscal and Monetary Policies on Stock Market Performance: An Empirical Study of Pakistan Stock Exchange Shahida Perveen * Mustaghis-ur-Rahman † Abstract: The purpose of this study is to investigate the impact of fiscal and monetary policies on stock market performance along with the identification of moderating role of political stability in Pakistan. Data of Pakistan stock exchange for last 36 years (1981 to 2016) has been analyzed by applying multiple analyt- ical methods. First, Stationary analysis has been performed through Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root tests. Based on its findings, confirmation of long run relationship has been done through Johansen co-integration analysis. The study has employed ordinary least square method (OLS) of regression analysis to analyze the nature of relationship in long run. Afterwards Error correction model has been used for analyzing short run relationship and Causal relationship has been tested through granger casualty test. The findings of research indicate the existence of long run relationship between both policies and stock market performance, while short run relationship exists only between monetary policy measures and stock market performance. Research also reveals that the Government expenditures, budget deficit and money supply reflect significant positive impact, while tax revenue and interest rate depict significant neg- ative impact on stock market capitalization in the long run. Further, political stability moderates only the relationship between interest rate and stock market capitalization, while other relationships are not moderated by political stability. Keywords: Stock market performance, fiscal policy, monetary policy, political stability Introduction The development and stability of stock market affect economy as a whole. The roles that stock markets play in the economy are raising capital, mobilizing savings for in- vestments, providing investment opportunities in a well governed and regulated envi- ronment, bringing companies and investors together and act as a barometer of economy. According to Filis (2010), stock market is a best gauge of future economic happenings. Considering the role that stock market plays in economic development and growth, its own growth and stability becomes crucial. Therefore, it is very important to look into the forces that drive the stock market performance. By identifying those factors and making strategies, stock market performance can be improved by consequently triggering eco- nomic growth. The stock market’s performance may be influenced by external as well as internal factors (Dragni´ c, 2014). Among other factors, the performance of stock market is also affected by government policies including fiscal and monetary policy (Asongu, 2012). * MS Finance Scholar, Department of Management Sciences, Bahria University, Karachi. E-mail: shahidafast@yahoo.com † Professor and Head of the Management Science Department, Bahria University, Karachi Campus. 2 Journal of Finance & Economics Research Vol. 3(2): 2-23, 2018 DOI: 10.20547/jfer1803201