Acta Univ. Agric. Silvic. Mendelianae Brun. 2017, 65(2), 465-472 | DOI: 10.11118/actaun201765020465

Effect of Money Supply on the Stock Market

Vladimír Pícha
Department of Finance, Faculty of Business and Economics, Mendel University in Brno, Zemědělská 1, 613 00 Brno, Czech Republic

This paper observes effect of money supply on the stock market through the portfolio balance channel as a transmission mechanism of monetary policy. National flow of funds accounts, specifically assets from US households' portfolios, represent a key data source. Johansen's cointegration methodology is employed in the empirical part of the paper to analyze both short term and long term relationships among researched variables. Estimates of vector error correction model help to reliably quantify intensity of the effect. Results show money supply excercises influence on valuation of S&P 500 index with 6 months lag. The impact is also distinguishable in the long run, whereas all observed asset classes can positively influence price of S&P 500. Findings are then contextualized in the concluding part of the paper using a monetary policy framework.

Keywords: Stock market, money supply, transmission mechanism, portfolio balance, flow of funds, cointegration, VECM

Prepublished online: April 30, 2017; Published: May 1, 2017  Show citation

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Pícha, V. (2017). Effect of Money Supply on the Stock Market. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(2), 465-472. doi: 10.11118/actaun201765020465
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