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The New Dynamic Between US Stock Prices and Money Holdings

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  • Frank Browne
  • David Cronin

Abstract

The financial crisis has had the effect of focusing attention on the role of liquidity, but more specifically excess liquidity, in driving asset prices to unsustainable bubble levels. We think this focus is fully warranted. However, we consider that, in this critical relationship between money and other financial assets, it is only half the story. Little attention has been devoted to date to examining whether this same money–financial asset interaction might also be responsible for the excess liquidity having been generated in the first place. We argue that it is. A new dynamic is at play in which newly liberalised and democratised financial markets, a hugely expanded role for (Keynesian) liquidity preference (driven by an asset demand for money), and a monetary policy constrained to respond to threats to financial stability, play key roles. We present evidence, using asset pairing, money and equities, which is supportive of our argument. These results have important implications for both monetary policy and financial stability.

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Bibliographic Info

Article provided by World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE in its journal World Economics Journal.

Volume (Year): 13 (2012)
Issue (Month): 1 (January)
Pages: 137-156

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Handle: RePEc:wej:wldecn:512

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Cited by:
  1. Cronin, David, 2014. "The interaction between money and asset markets: A spillover index approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 185-202.

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