Stock Market Returns and Monetary Aggregates: Recent Evidence on the Issue of Causality

• Published in: RBER, review of business and economic research review of business and economic research, 1981-10, Vol.17 (1), p.40
• Main Authors: Leonard, David C, Kehr, James B
• Format: Article
• Language: English
• Subjects: Causality; Changes; Effects; Expectations; Mathematical models; Money supply; Rates of return; Regression analysis; Securities markets; Stock prices
• ISSN: 1058-3300; 0362-7985; 1873-5924

One controversial issue is the nature in which monetary impulses are reflected in the portfolio adjustments of individuals. It is widely accepted that such a relationship exists, but the direction of causality is still the subject of recent debate. Rogalski and Vinso have reported empirical results that show the market leads unanticipated changes in money by 5 months. The ultimate issue is the reliability of recent developments in empirical procedures to test for the existence and direction of causality. An attempt is made to improve upon the methodology of Rogalski and Vinso, and an examination is made of the more recent period from January 1972 through December 1978. Considering that this period is one in which the Federal Reserve (the Fed) presumably targeted monetary aggregates, an analysis is included of the monetary base and total reserves, and changes in the money supply. The results of the study indicate a contemporaneous or instantaneous feedback relationship between unanticipated changes in monetary aggregates and stock returns for the period examined. The findings are inconsistent with those of Rogalski and Vinso which indicate market returns lead unanticipated changes in money.