Analyzing the Effect of Change in Money Supply on Stock Prices

Abstract

Money supply is one of the components of monetary policy that the Federal Reserve uses. Changes in money supply can be either anticipated or unanticipated by the people. It is believed that anticipated and unanticipated changes in the money supply affect the stock market differently. Taking this point into consideration, I will differentiate the anticipated and unanticipated components of changes in the money supply and analyze how each affects stock market prices. In Section II, the theoretical framework is discussed along with the relevant literature on the topic. Next, in Section III, the variables and data set utilized in this study are described and the empirical model is developed. Results are presented and discussed in Section IV. The paper concludes with Section V, in which suggestions for further studies are pointed out and policy implications are considered.

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