Effect of money supply on the Dow Jones Industrial Average stock index

Abstract

This focus of this paper are the effects and implications of a change in the money supply for share price indices in the USA during 1959–2011. The money supply will be measured by the M2 and MZM aggregates (money with zero maturity). The US stock market is represented by the Dow Jones Industrial Average index. The objective of this paper is to find, describe and evaluate the effects of changes to the money supply (M2 and MZM) on the US stock market. A partial objective of this paper is to determine whether a change in the monetary aggregate shows in the stock index immediately or with a delay of several weeks. Another aim is to determine whether asset prices influence the money supply.

Keywords

• money supply
• stock market
• correlation
• Dickey-Fuller test
• Granger causality