Empirical Study On The Relationship Between Money Supply And Stock Prices In The United States

The United States has a more mature and developed typical market economy, which is fully reflected in the U.S. stock market. The development of its stock market has a long history. Its stock market is often referred to as a "barometer" of the macro economy. The U.S. stock market not only provides more investment opportunities and investment forms, but also an important way for the United States to finance and investment. If the implementation of monetary policy to adjust the money supply will affect stock prices and investors can scientifically analyze the impact of this policy on stock prices, when monetary policy changes, investors will be able to develop their own profitable investment plan based on their own analysis. If policy makers fully understand the impact of their policies on stock prices and the impact of stock prices on their policies, they can make reasonable policies to achieve the stability of the stock market and promote its contribution to economic growth.The domestic and foreign related literatures are reviewed in this paper. It is found that conclusions are not the same because of the different levels of money supply, the different time span of the selected data and the different research angles in different literatures. This paper also introduces the theory of the effect of money supply on stock prices and the theory of stock prices’ influence on money supply.This paper employs ADF test, co-integration test, error correction model and Granger causality test to deal with the relevant data of money supply and stock prices in the United States. Combined with the relevant economic theories and policy analysis, the following conclusions are drawn:There is a long-term equilibrium relationship between the currency and the S&P 500 index. The currency is the Granger reason of the S&P 500 index. However the Granger cause of the S&P 500 index is not the currency. Error correction model results show that in the long term, the currency has a positive effect on the standard & Poor’s 500 index, but the effect is not very large, and in the short term, the standard & Poor’s 500 index and the currency have a certain relationship and rational ingredients. M1, M2, M1/M2 and stock prices of The United States does not exist co-integration relationship.Therefore, investors should pay more attention to the relationship between the currency and the standard & Poor’s 500 index, rather than relationships between money supply and stock prices in other levels. Depending on the currency liquidity, flows of money are different. The supply and demand of assets in areas where money flows will change. Due to the currency impacts stock prices, the central bank can influence and regulate stock price volatility through monetary policy. The central bank should gather a lot of information about the stock market, pay attention to the trend of stock prices, make a concrete analysis of the specific circumstances of the stock market, formulate appropriate monetary policy to transfer information and try to reduce the negative effect of the stock market bubble on the real economy to achieve the goal of stable economic development.