Monetary Policy and the Stock Market: Theory and Empirical Evidence

This paper gives a comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy. This is an area of research that has interested monetary and financial economists for a long time. Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigated whether equity is a good hedge against inflation. Empirical studies show that money can be helpful in predicting future stock returns. Empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run. The short-run negative relation between stock returns and inflation can easily be explained by theoretical models. If the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns, while if it conducts a procyclical policy we could observe a positive relation. According to both theoretical and empirical studies investors receive an inflation risk premium for holding equity.     

Indirect Reciprocity and Corporate Philanthropic Giving: How Visiting Officials Influence Investment in Privately Owned Chinese Firms

This study examines how privately owned firms that are listed on Chinese stock exchanges and often surrounded by Buddhist or Taoist temples use money to bind themselves to officials who can mitigate their underinvestment problems. Philanthropic giving is a traditional way of achieving this task. Based on social‐exchange theory, we consider the potential for indirect reciprocity, in which visiting officials do favours for local businesses that do favours for other social actors. We analyse whether China’s Buddhist and Taoist cultures influence how philanthropic giving induces visiting officials to do favors. We also examine temple locations and the behaviours of privately owned firms listed on Chinese stock exchanges from 2001 to 2012 in an empirical study that provides strong support for our arguments. Results show that philanthropic giving initiates and amplifies indirect reciprocity between visiting officials and local businesses, thereby increasing corporate investment. The magnitudes of these effects depend on the magnitude of religious norms. Our study thus illuminates the influence of visiting officials on corporate investment.     

Macroeconomic influences on the stock market

The paper studies the dynamic interactions among indicators of economic activity, such as industrial production, interest rate and exchange rate, the performance of the foreign stock market, oil prices, and stock returns to examine whether economic activity movements affect the performance of the stock market for Greece. The empirical evidence suggests that stock returns do not lead changes in real economic activity while the macroeconomic activity and foreign stock market changes explain only partially stock market movements. Oil price changes explain stock price movements and have a negative impact on macroeconomic activity.     

Budget deficits and stock prices: International evidence

The purpose of this research is to provide empirical evidence regarding deficits and their effects on stock prices. We investigate whether changes in deficits cause changes in stock prices and if so, in what direction. We use Granger causality tests and impulse response analysis of vector autoregressive models to assess the relationship between budget deficits and stock prices in several industrialized nations. The evidence from impulse response analysis and Granger causality tests shows that only in the U.S. deficit reductions have an inverse effect on equity returns.     

The Global System of Finance

A bstract .   In the last decades, revolutionary changes in financial markets, instruments, and institutions have stimulated empirical and theoretical investigations into the interaction of the financial and the "real" side of economic systems. While a considerable body of empirical investigations seems to provide evidence of positive correlations between stock market development and economic growth, there is no consensus in other social sciences as to whether there are two-way linkages, and if so, how to conceive a possible mechanism of interaction. Particularly, the hypergrowth and ubiquity of financial markets has triggered controversial debates on how to understand today's economic landscape. With the objective of clarifying the relationship between finance and economy, this article restructures the present debate through the lenses of Talcott Parsons's and Niklas Luhmann's theories of social systems. Basic system-theoretical ideas on social aspects of finance and economy as well as on uncertainty and risk hint at new insights into the global system of finance that might go far beyond explanatory models of causality.     

国际短期资本流动对货币政策有效性的影响分析——基于VAR模型和脉冲响应函数的研究

采用VAR模型和冲脉效应函数实证分析国际短期资本流动对货币政策有效性的影响分析,结果显示：货币供给量、利率和国际短期资本流动之间具有长期稳定的均衡关系;利率变动和货币供给之间反向变动;国际短期资本流动对货币政策有效性的影响已经显现,然而国际短期资本流动带来的货币供应量的上升被国家货币政策的调控所冲销,而且冲销力度过大;由于我国对资本流动进行管制,因此隐蔽性资本流动对货币政策效果目标的影响不明显;进出我国的国际短期资本的套利动机虽然不显著,但是国际短期资本流动和利率的关联性已经很强。最后,以实证结果为依据,提出相应对策建议。     

Money and production: A stochastic frontier approach

Considerable controversy surrounds the role of money in the production of goods and services. Previous empirical research has appeared to find that the real money stock affects aggregate output, holding other, more conventional inputs constant. However, the theoretical literature offers no convincing explanation for this empirical finding. One interpretation is that real money balances reduce the extent to which labor and capital are diverted into exchange-related activities instead of being used in production defined in a more narrow sense. To investigate this hypothesis, we estimate a production function augmented with real money balances as an input, using time-series data for the aggregate U.S. economy. A stochastic production frontier is then estimated without real money balances. We use these estimates to establish the presence of technical inefficiency. Finally, we show that the extent of technical inefficiency is negatively correlated with the real money stock. Our results provide a reconciliation between the empirical literature, which finds that real money balances affect output in a production function framework, and the theoretical literature, which suggests that real money balances enhance the technical efficiency of the economy.     

Effects of the fat-tail distribution on the relationship between prospect theory value and expected return

This study investigates the negative relationship between prospect theory value and expected return considering the fat-tail property of the return distribution. The results of both decile portfolio and cross-sectional regression show evidence supporting the hypothesis related to prospect theory value. However, these results are very sensitive to whether the model includes a short-term reversal factor. In the empirical design combining the hypothesis with the degree of fat-tail of the return distribution, stock groups with the fat-tail return distribution definitely show that prospect theory value has a significant information value for explaining expected return, regardless of whether the short-term reversal and other factors are included in the models. These results suggest that both the fat-tail property in the stock return distribution and the property of the skewed return distribution must be considered in examining the relationship between prospect theory value and expected return. Furthermore, our findings on the effects of the fat-tail property of the return distribution are verified through robustness testing while considering changes in empirical design and using out-of-sample stock markets of the U.S., Japan, and China, as well as the in-sample Korean stock market.     

Dynamic Structure of Disequilibrium Models

This paper investigates the dynamic structure of a standard disequilibrium model. By assuming that the model variables are non-stationary time series with respect to ample empirical evidence, we find the following: 1) It is the exogenous variables rather than the price adjustment process that form the real adjustment force of the model; 2) Quantity disequilibrium and price disequilibrium are isomeric in the model, and follow a weakly stationary process when all the variables areI (1) nonstationary; 3) The disequilibrium process has a none-zero mean when the weakly exogenous variables of the demand equation do not cointegrate with those of the supply equation, corresponding to certain 'chronic disequilibrium' phenomena; 4) The isomerism between quantity disequilibrium and price changes makes it unnecessary to lean on the 'min condition' to characterise disequilibrium.     

Finite sample properties of a simple LM test for neglected nonlinearity in error-correcting regression equations

The finite sample properties of LM-type linearity tests based on the discussion in G ranger (1995) are examined. The tests are constructed based on regression models which contain stationary linear and nonlinear functions of nonstationary variables, thus generalizing standard linear cointegrating equations. Power and size simulations are promising, suggesting that the tests are worthy of further examination, and an illustrative empirical example shows that some form of nonlinear error-correction may be useful for explaining the evolution of U.S. money stock in a simple vector autoregression framework.     

The effects of foreign exchange and monetary policies in Russia

This paper examines the effects of Russian foreign exchange and monetary policies under conditions of abundant natural resources during the period 1999–2011 using structural VAR models. The results suggest that monetary policy shocks, which are identified as money supply disturbances, have a persistent effect on real output, and more than half of the volatility in real output can be explained by changes in the money supply. Furthermore, the analysis reveals that stock prices are a more significant transmission channel of monetary policy than bank loans.     

Monetary Ratios in a Modern Regime: Why the Monetary Base still Matters

A recent paper Bank of England paper cast doubt on the ‘textbook’ model of the money multiplier. However, this criticism is inconsistent and misleading. It understates the importance of the central bank's control over the monetary base, and how this influences the money supply. The confusion suggests that it would be more fruitful to conduct analysis using the currency‐deposit ratio and reserve‐deposit ratio rather than the money multiplier, and evidence from 1998–2013 is provided. This article explains how these ratios depend on the monetary regime, and the distinction between inside and outside money. Although a modern regime alters the way that money creation occurs, the monetary base still matters.     

Debt Erosion and the Market Process

This paper explores the effects of debt erosion on the market process. Debt erosion is the attempt by government to lower the real value of its debt through the creation of unexpected inflation. In addition to the costs recognised by most economists, debt erosion through unexpected inflation can impair the price system's ability to coordinate exchange activity and can result in costly capital misallocations. This is because the creation of unexpected inflation implies disequilibrium in the money market. To avoid the harm from such monetary shocks, this paper suggests a separation between money and state, enshrined in an explicit rule at the constitutional level.     

Connectedness and risk spillovers in China’s stock market: A sectoral analysis

This paper shows how sectors in the Chinese stock market are connected and investigates risk spillovers across these sectors. Using graph theory and a recently developed time series technique, we are able to identify the systemically important sector in the market and the patterns of risk spillovers across sectors over time. Unlike standard econometric modeling, graph theory enables us to approach this question in a more reader-friendly way. The empirical results show that Industrial sector plays a central role and should thus be considered the systemically most important sector in the Chinese stock market. The spillover structure is found to be time-varying. While Industrial sector dominates the system for most of the time, other sectors such as Consumer Discretionary sector also occasionally appear as the central sector. Our empirical results also indicate that the simple correlation-based approach can produce equally useful information as more advanced econometric models.     

Predictability of bull and bear markets: A new look at forecasting stock market regimes (and returns) in the US

The empirical literature of stock market predictability mainly suffers from model uncertainty and parameter instability. To meet this challenge, we propose a novel approach that combines dimensionality reduction, regime-switching models, and forecast combination to predict excess returns on the S&P 500. First, we aggregate the weekly information of 146 popular macroeconomic and financial variables using different principal component analysis techniques. Second, we estimate Markov-switching models with time-varying transition probabilities using the principal components as predictors. Third, we pool the models in forecast clusters to hedge against model risk and to evaluate the usefulness of different specifications. Our weekly forecasts respond to regime changes in a timely manner to participate in recoveries or to prevent losses. This is also reflected in an improvement of risk-adjusted performance measures as compared to several benchmarks. However, when considering stock market returns, our forecasts do not outperform common benchmarks. Nevertheless, they do add statistical and, in particular, economic value during recessions or in declining markets.     

DO WE REALLY NEED CENTRAL BANKS?

An analysis of economic theory and economic history suggests that central banks, with a monopoly of money-issuing services, are not necessary. The often-levelled arguments against private banks issuing money in competition with each other and with central banks do not stand up to close scrutiny.     

Estimating and accounting for the output gap with large Bayesian vector autoregressions

We consider how to estimate the trend and cycle of a time series, such as real gross domestic product, given a large information set. Our approach makes use of the Beveridge–Nelson decomposition based on a vector autoregression, but with two practical considerations. First, we show how to determine which conditioning variables span the relevant information by directly accounting for the Beveridge–Nelson trend and cycle in terms of contributions from different forecast errors. Second, we employ Bayesian shrinkage to avoid overfitting in finite samples when estimating models that are large enough to include many possible sources of information. An empirical application with up to 138 variables covering various aspects of the US economy reveals that the unemployment rate, inflation, and, to a lesser extent, housing starts, aggregate consumption, stock prices, real money balances, and the federal funds rate contain relevant information beyond that in output growth for estimating the output gap, with estimates largely robust to substituting some of these variables or incorporating additional variables.     

Endogenizing the provision of money: Costs of commodity and fiat monies in relation to the value of trade

We consider the problem of including the costs and value of the institutions that define money and support trade, within the framework of economic optimization. We compare monetary systems mediated by durable commodity monies, versus pure fiat monies, in order to understand the separation and eventual independence of the institutionally-created value of money from the values of underlying traded goods. We treat the emergence of monetary function as a problem in mechanism design, modeled by minimal strategic market games that overcome a generalized Jevons failure when agents must commit ahead of time to specialist resource production. We consider in particular the problem of defining closures with respect to both money flows and labor-allocation and trading decisions, and show that minimal models require many of the fundamental institutions of banking and contract enforcement found in real economies, in order to define a self-policing system. We define costs, value, and the efficiencies of the institutions that support trade in terms of a natural money-metric welfare function, and compare the characteristics of commodity and fiat monies by these measures. Through careful treatment of the stock/flow distinction in repeated-game settings, we find that commodity money, even when its value derives heavily from its institutional role, remains defined by its flow characteristics, in contrast to fiat money, for which the control function is defined inherently in terms of stock variables. Our notation is somewhat nonconventional for economics but to do justice to econo-physics concepts such as scaling and dimensional analysis and to stress the distinction between stocks and flows, we believe this notation is justified. We provide a full listing of notation in Appendix A.     

货币政策和居民收入对房价影响的实证分析

近年来,房地产价格持续快速增长,影响房价的因素有很多,文章以辽宁省为例,建立贷款利率、货币供应量、城镇居民可支配收入和房屋销售价格的VAR模型,进行实证研究。利用EVIEWS7.0软件对模型进行脉冲响应函数和方差分解分析,得出贷款利率、货币供应量和居民可支配收入均对房价产生正向影响,并且居民可支配收入的贡献度最强,五年以上贷款利率贡献度最弱。