Money Supply Influence on Gross Domestic Product throughout Stock Markets in United States and European Union
Money Supply Influence on Gross Domestic Product throughout Stock Markets in United States and European Union

Summary/Abstract: Stock and capital markets are undoubtedly part of an economy. The aim of the paper is to find link between GDP development, stock markets performance and money supply in two stages. Firstly, identify possibility to predict GDP development in the US and the EU using main stock market indices evolution via applying Granger causality testing. In line with literature we achieved results confirming uni directional causality from index values for GDP. Secondly, to determine if there is link between money supply change and indices development, we use linear regression models. By those two approaches, we attempt to prove, that change in money supply have effect on stock market development, and subsequently, this development will be followed by GDP evolution. In line with our expectations, models prove statistically significant influence of money supply on indices. According to our tests, we consider linkage money supply-stock markets-GDP strong. Also we observed contradictory relationships of money supply and index performance in the EU and the US. This should be substantial point for next research, and also for monetary authorities, especially during extremely accommodative monetary policy that uses unconventional instruments such as QE. We consider those contradictory results as a sign of different level of development of stock and capital markets in the US and the EU.

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