Stock Market Development, Can it Help Reduce Inflation in SAARC Countries?

Ibrahim Sulaiman, Noman Arshed and Muhammad Shahid Hassan

This study is designed to evaluate the impact of stock market development on general price level in five SAARC countries. The estimated results of Panel OLS, Fixed Effect model and Random Effect model has revealed that OLS model is not applicable thus, we have to use panel cointegration to find out the unbiased and normally distributed coefficient estimates to find out how the stock market development influences inflation. The results of long run estimates Fully Modified OLS suggests that in the long run, market capitalization is decreasing inflation, total value of stock traded is increasing inflation and turnover ratio is decreasing inflation in the long run. Thus, the results of our two proxies suggest that stock market development can help put chains on inflation in SAARC countries by introducing more firms to increase size and volume of share transaction, as they will load to rise in production.