JBS Vol 15. Num 2. 2013 - An Investigation of the Relationship between Money Growth and Stock Prices Using Bangladeshi Data

Economic theories argue that growth in money supply affects stock prices positively. This takes place in two steps: an increase in money supply, for given money demand, decreases interest rate, which then increases investment in stocks. In an economy at full capacity, it can, of course, cause inflation to go up, which can also affect stock prices positively through increased demand (Fisher 1930). However, empirical studies show mixed results. In this study, we analyzed the existence and direction of any relationship between money supply and stock prices using Bangladeshi data. This information is important for Bangladesh Bank, as it recently took a contractionary monetary policy stance to curb the boom in the local stock market. If changes in money supply do not have any significant effect on stock prices, then such an action will only interfere with the natural course of the real economy, without achieving its intended outcome.