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The Impact of Money Supply and Interest Rates on Stock Prices: Insights from Two New Behavioral Experiments and a Proposal for a New Price to Earnings Ratio

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  • Christian A. Conrad

Abstract

This paper examines the impact of monetary expansion and interest rate changes on stock market investment behavior through two behavioral experiments conducted with student as participants, using MS Teams and Excel. The experimental results indicate that increases in the money supply and reductions in interest rates lead to higher share prices. These findings support the hypothesis that an aggressive monetary policy—characterized by an expansive money supply and low, zero, or even negative interest rates—can contribute to the formation of financial bubbles in equity markets. From this perspective, central banks should exercise caution in their interest rate and monetary policy interventions. To reduce the risk of a market crash, any exit from such policies should be implemented gradually.

Suggested Citation

  • Christian A. Conrad, 2026. "The Impact of Money Supply and Interest Rates on Stock Prices: Insights from Two New Behavioral Experiments and a Proposal for a New Price to Earnings Ratio," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 18(4), pages 1-66, April.
    • Handle: RePEc:ibn:ijefaa:v:18:y:2026:i:4:p:66
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    References listed on IDEAS

    as
    1. Lucy F. Ackert & Narat Charupat & Bryan K. Church & Richard Deaves, 2006. "Margin, Short Selling, and Lotteries in Experimental Asset Markets," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 419-436, October.
    2. Conrad, Christian A. & Stahl, Markus, 2002. "Asset-Preise als geldpolitische Zielgröße: Das Beispiel der USA," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW - Leibniz Information Centre for Economics, vol. 82(8), pages 486-493.
    3. Campbell, John Y & Ammer, John, 1993. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Journal of Finance, American Finance Association, vol. 48(1), pages 3-37, March.
    4. Lucy F. Ackert & Narat Charupat & Bryan K. Church & Richard Deaves, 2006. "Margin, Short Selling, And Lotteries In Experimental Asset Markets," Southern Economic Journal, Southern Economic Association, vol. 73(2), pages 419-436, October.
    5. Pagan, Adrian R. & Schwert, G. William, 1990. "Testing for covariance stationarity in stock market data," Economics Letters, Elsevier, vol. 33(2), pages 165-170, June.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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