IDEAS home Printed from
   My bibliography  Save this paper

Impact of monetary policy on US stock market


  • Sirucek, Martin


Purpose of the article The present article deals with associations between the development of money supply measured by the money aggregate M2 and the development of the Ameri-can stock index Dow Jones Industrial Average. The objective of the article is to determine, describe and assess the impact of the changes of money supply (as measured by the money aggregate M2) on the development of the American stock market. Another objective is to find out whether the changes in money supply are reflected in the changes of stock prices immediately or with a time delay of several weeks. Methodology/methods Regarding to the aim of the article was all useful historic data of money suplly (measured with money aggregate M2) and close values of DJIA obtain in monthly frequence, since 1959 to 2011. From econometric methods, will be using Pearson correlation index, Dickey-Fuller stationary test and test of Granger causality, which will be focus on realtionship between money supply (M2) and stock prices (DJIA index). Scientific aim The aim of this article is by using econometric methods find, describe and analyze ipact of changing money supply to selected stock market. The second aim is disclose, if stock market react immediately or with time delay (in week). Findings The correlation analysis shows, that between change of money supply and stock index is high dependence (correlation index 0.9224). By calculating with time delay, was correlation index high too, but slowly decrease. By market colaps in year 2007 and 2008, was correlation index negative with value -0.9477, no matter to money supply rasing, that is meaning, that investors have to calculate with psychologic factors, which are very strong in nervous time and market crashes. The result of Granger causality test for 1 month delay failed to show a relationship between money supply and DJIA index. With application of 2, 3 and 6 month delay the dependence was demonstrated, rejecting the null hypothesis stat-ing that the M2 money aggregate does not affect the DJIA stock index Conclusions (limits, implications etc) Reached results can be biased by using first diferention of raw data and in correlation analysis was using raw (non-sesonally adjusted) data of development DJIA index and sesonally adjusted data of money supply. The weak spot is using Dow Jones Index in place of S&P 500 index, which is more wider. By changes in analysis is possible to measure the impact of money supply (measured by Money with Zero Maturity aggregate) on stock index and compare both results and make decision, which aggregate is better for forecasting.

Suggested Citation

  • Sirucek, Martin, 2011. "Impact of monetary policy on US stock market," MPRA Paper 40943, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:40943

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Pearce, Douglas K & Roley, V Vance, 1985. "Stock Prices and Economic News," The Journal of Business, University of Chicago Press, vol. 58(1), pages 49-67, January.
    2. Kraft, John & Kraft, Arthur, 1977. "Determinants of Common Stock Prices: A Time Series Analysis," Journal of Finance, American Finance Association, vol. 32(2), pages 417-425, May.
    3. Hancock, D. G., 1989. "Fiscal policy, monetary policy and the efficiency of the stock market," Economics Letters, Elsevier, vol. 31(1), pages 65-69.
    4. Jan Hanousek & Randall K. Filer, 2000. "The Relationship Between Economic Factors and Equity Markets in Central Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(3), pages 623-638, November.
    5. Mukherjee, Tarun K & Naka, Atsuyuki, 1995. "Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(2), pages 223-237, Summer.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Money supply; stock market; correlation; Dickey-Fuller test; Granger causality;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:40943. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.