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The Effects of Money Supply and Interest Rates on Stock Prices, Evidence from Two Behavioral Experiments

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  • Christian A. Conrad

Abstract

What is the impact of interest rate and monetary policy on the stock market? Some studies find a positive impact of expansive monetary policy on stock prices others prove the opposite. This paper examines the effects of monetary expansion and interest rate changes on investment behavior on the stock market by illustrating two behavioral experiments with students. In our experiments the increase of money supply and the decrease of interest rates had a direct positive impact on share prices. These findings support the hypothesis that extreme expansive monetary policy with low, zero or negative interest rates encourage financial bubbles on the stock market. To avoid a crash the exit from such a policy must be slow. As happened in 1929, crashes can damage the financial system and the real economy. Central banks must take this into account in their monetary policy.

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  • Christian A. Conrad, 2021. "The Effects of Money Supply and Interest Rates on Stock Prices, Evidence from Two Behavioral Experiments," Applied Economics and Finance, Redfame publishing, vol. 8(2), pages 33-41, March.
    • Handle: RePEc:rfa:aefjnl:v:8:y:2021:i:2:p:33-41
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    References listed on IDEAS

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    Cited by:

    1. Guizhou Wang & Kjell Hausken, 2023. "Modeling which Factors Impact Interest Rates," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 12(2), pages 211-237.
    2. Chiang, Thomas C. & Chen, Pei-Ying, 2023. "Inflation risk and stock returns: Evidence from US aggregate and sectoral markets," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    3. Guizhou Wang & Kjell Hausken, 2022. "A Generalized Interest Rates Model with Scaling," International Journal of Economics and Financial Issues, Econjournals, vol. 12(5), pages 143-150, September.
    4. Wang, Xiangning & Huang, Qian & Zhang, Shuguang, 2023. "Effects of macroeconomic factors on stock prices for BRICS using the variational mode decomposition and quantile method," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).

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    JEL classification:

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

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