The Relationship of Monetary and Fiscal Policy Credibility with the Stock Market Volatility in a Developing Country.

The article investigates the relationship between fiscal and monetary credibility and the volatility of the Brazilian stock market index, Ibovespa. Using volatility derived from a GARCH (Generalized Autoregressive Conditional Heteroscedasticity) model as the dependent variable, the study employs fiscal and monetary credibility indexes as proxies to assess their impact on stock market volatility from 2003 to 2017. Results indicate that higher fiscal credibility, reflecting stable public debt management, is associated with reduced Ibovespa volatility, while monetary credibility shows a more complex short-term positive association with volatility, possibly due to new information effects. Overall, the findings suggest that greater credibility in Brazil’s macroeconomic policies enhances stock market stability and investor confidence, although political crises can increase volatility.