Money supply, opinion dispersion, and stock prices

Shinichi Hirota

Journal of Economic Behavior & Organization, 2023, vol. 212, issue C, 1286-1310

Abstract: This study develops a simple model that shows how money matters in the determination of stock prices. When investors have different opinions on the stock's value and face market frictions, the money supply in an economy influences the demand for stocks and hence positively affects stock prices. Unlike the discounted-cash-flow model, the present model indicates that stock prices routinely depart from the fundamentals; overpricing or underpricing occurs depending on the amount of money in the economy. The results of the model suggest that stock prices fluctuate because of money supply changes and that monetary policy may cause a disconnect between the stock market and the real economy.

Keywords: Stock price; Money supply; Opinion dispersion; Monetary policy; Stock return; Overpricing (search for similar items in EconPapers)
JEL-codes: E51 E52 G12 G35 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:212:y:2023:i:c:p:1286-1310

DOI: 10.1016/j.jebo.2023.06.014

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