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Money supply, interest rate, liquidity and share prices: A test of their linkage

This paper reports new evidence of a liquidity effect on share prices from money supply changes. Money supply impacts on interest rate and liquidity were first proposed in 1969 and there is evidence that money supply increase leads to interest rate decline. Yet the proposition that money supply incr...

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Main Authors: Mohamed Ariff,, Chung, Tin-Fah *, Shamsher M.,
Format: Article
Language:English
Published: Elsevier Ltd 2012
Subjects:
HB Economic Theory
HJ Public Finance
Online Access:http://eprints.sunway.edu.my/159/1/Chung%20Tin%20Fah%20-%20Money%20Supply%20interest%20Rate%20Liquidity%20and%20Share%20Prices.pdf
http://eprints.sunway.edu.my/159/
http://www.sciencedirect.com/science/article/pii/S1044028312000361
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spelling my.sunway.eprints.1592013-07-09T01:37:47Z http://eprints.sunway.edu.my/159/ Money supply, interest rate, liquidity and share prices: A test of their linkage Mohamed Ariff, Chung, Tin-Fah * Shamsher M., HB Economic Theory HJ Public Finance This paper reports new evidence of a liquidity effect on share prices from money supply changes. Money supply impacts on interest rate and liquidity were first proposed in 1969 and there is evidence that money supply increase leads to interest rate decline. Yet the proposition that money supply increase should lead to liquidity surge – thus to credit expansion – has yet received unanimous empirical support. Using quarterly data over 1968-2011, our results from a two-stage simultaneous solution of a system of equations indicate that money supply changes lead to a positive liquidity effect, as per the theory prediction. By extending the liquidity equation to asset prices, we also show that liquidity change has a significant positive effect on share prices, after controlling the effect of earnings. These findings, obtained after solutions to serious econometric issues of existing studies, appear to provide a clear verification of theory on the money supply effect on liquidity and on asset price. Elsevier Ltd 2012 Article NonPeerReviewed text en http://eprints.sunway.edu.my/159/1/Chung%20Tin%20Fah%20-%20Money%20Supply%20interest%20Rate%20Liquidity%20and%20Share%20Prices.pdf Mohamed Ariff, and Chung, Tin-Fah * and Shamsher M., (2012) Money supply, interest rate, liquidity and share prices: A test of their linkage. Global Finance Journal, 23 (3). pp. 202-220. ISSN 1044-0283 (Submitted) http://www.sciencedirect.com/science/article/pii/S1044028312000361
institution Sunway University
building Sunway Campus Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Sunway University
content_source Sunway Institutional Repository
url_provider http://eprints.sunway.edu.my/
language English
topic HB Economic Theory
HJ Public Finance
spellingShingle HB Economic Theory
HJ Public Finance
Mohamed Ariff,
Chung, Tin-Fah *
Shamsher M.,
Money supply, interest rate, liquidity and share prices: A test of their linkage
description This paper reports new evidence of a liquidity effect on share prices from money supply changes. Money supply impacts on interest rate and liquidity were first proposed in 1969 and there is evidence that money supply increase leads to interest rate decline. Yet the proposition that money supply increase should lead to liquidity surge – thus to credit expansion – has yet received unanimous empirical support. Using quarterly data over 1968-2011, our results from a two-stage simultaneous solution of a system of equations indicate that money supply changes lead to a positive liquidity effect, as per the theory prediction. By extending the liquidity equation to asset prices, we also show that liquidity change has a significant positive effect on share prices, after controlling the effect of earnings. These findings, obtained after solutions to serious econometric issues of existing studies, appear to provide a clear verification of theory on the money supply effect on liquidity and on asset price.
format Article
author Mohamed Ariff,
Chung, Tin-Fah *
Shamsher M.,
author_facet Mohamed Ariff,
Chung, Tin-Fah *
Shamsher M.,
author_sort Mohamed Ariff,
title Money supply, interest rate, liquidity and share prices: A test of their linkage
title_short Money supply, interest rate, liquidity and share prices: A test of their linkage
title_full Money supply, interest rate, liquidity and share prices: A test of their linkage
title_fullStr Money supply, interest rate, liquidity and share prices: A test of their linkage
title_full_unstemmed Money supply, interest rate, liquidity and share prices: A test of their linkage
title_sort money supply, interest rate, liquidity and share prices: a test of their linkage
publisher Elsevier Ltd
publishDate 2012
url http://eprints.sunway.edu.my/159/1/Chung%20Tin%20Fah%20-%20Money%20Supply%20interest%20Rate%20Liquidity%20and%20Share%20Prices.pdf
http://eprints.sunway.edu.my/159/
http://www.sciencedirect.com/science/article/pii/S1044028312000361
_version_ 1644324258568994816
score 13.211869

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