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Money supply, interest rate, liquidity and share prices: A test of their linkage

Mohamed Ariff (), Tinfah Chung () and Shamsher M.
Authors registered in the RePEc Author Service: Shamsher Mohamad

Global Finance Journal, 2012, vol. 23, issue 3, 202-220

Abstract: The money supply impacts on interest rate and liquidity were first proposed in 1961 by Friedman, the late Nobel laureate. The liquidity effect has yet received unanimous empirical support. Also, research interest on liquidity subsided in the 2000s. Using quarterly data over 1960–2011 and simultaneous solution to a system of equations, this paper reports positive liquidity effect from money supply. By extending the system of equations with a liquidity equation and after controlling the effect of earnings, evidence is found of a significant positive effect from liquidity on share prices. Money supply is found to be endogenous as in post Keynesian theory. These findings, obtained after solutions to several econometric deficiencies in prior studies, provide clear verification of the endogenous money supply theory, money effect on liquidity and on the extension of the model for a liquidity effect on asset prices.

Keywords: Liquidity; System of equations; Causality test; Share prices; Global financial crisis; Monetary regimes (search for similar items in EconPapers)
JEL-codes: E41 E44 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:23:y:2012:i:3:p:202-220

DOI: 10.1016/j.gfj.2012.10.005

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