Is it true that changes in money supply are an important driving force behind changes in the stock price indexes?
Intuitively it makes sense to argue that an increase in the growth rate of money supply should strengthen the growth rate in stock prices.
Conversely, a fall in the growth rate of money supply should slow down the growth momentum of stock prices.
Some economists who follow the footsteps of the post-Keynesian (PK) school of economics have questioned the importance of money in driving stock prices[1]. It is held that rises in stock prices provide an incentive to liquidate long-term saving deposits, thereby boosting the money supply.
The received money then employed in buying stocks and other financial assets. According to the PK the trend is reversed when stock prices are falling. Hence, changes in stock prices cause changes in money supply and not the other way around.
Does a shift of money from savings to demand deposits affect money supply?
Is it possible to have an increase or a decline in money supply because of a shift of money from long-term saving deposits to demand deposits and vice versa?[2]
Can there be such thing as saving deposits? The existence of such deposits implies that money somehow can be saved. We hold that individuals do not save money. They only exercise demand for money in order to be able to employ it as a medium of exchange whenever they deemed it necessary.
For instance, out of his production of twelve loaves of bread a baker may consume two loaves of bread and save ten loaves. He then exchanges these ten loaves for ten dollars with a shoemaker.
…click on the above link to read the rest of the article…
