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On the relationship between stock prices and the quantity of money Martinoff, Michael
Abstract
The old Quantity Theory of the Value of Money can be expressed as the "Equation of Exchange," MV=PT, in which M is the quantity of money, V is the velocity of circulation of money, P is the price level, and T is the total number of transactions during the period under consideration. The major shortcoming of the old Quantity Theory was that velocity (V) was taken to be numerically constant, which it is not. The new Quantity Theory is a theory of the demand for money as an asset, productive capital yielding a stream of income in the form of convenience, security, and so on. According to this theory, people hold portfolios containing money, bonds, equities, and other assets, and they adjust their portfolios so that they obtain the maximum returns therefrom. The demand for money can be expressed in terms of the demand for other assets (in real terms), the behaviour of the general price level, people's utility preferences, and their total wealth. Given a function describing total income, an equation describing the velocity of circulation of money can be written as the quotient of the income function divided by the demand for money function. This is the difference between the new and old Quantity Theories: under the old, the velocity of money was considered to be a numerical constant; under the new it is described as a function of income and the demand for money. In accordance with the above theory, when a monetary disturbance is introduced by the central bank, people will want to adjust their portfolios in such a way as to compensate for the disturbance. The initial impact of the monetary disturbance is in the markets for the most liquid assets: the financial markets. This idea was tested by correlation analysis on Canadian data of money supply and stock prices and variants thereof for the years 19241967. Even after the influence of trend had been removed from the data, statistical support was found for the above theory, but only after the influence of random variation had been reduced by sixmonth moving averaging. However, the evidence—a significant correlation of .259 between percent change in money and percent change in stock prices—suggests that monetary change accounts for only about 6.7 percent of the variation in stock prices. But this conclusion must be tempered by the realisation that variable lags of the same nature as those that exist between monetary change and change in the level of business activity can be expected to exist between monetary change and change in the level of stock prices. Thus it can be argued that the results of correlation analysis tend to understate the actual impact of monetary change on stock prices.
Item Metadata
Title 
On the relationship between stock prices and the quantity of money

Creator  
Publisher 
University of British Columbia

Date Issued 
1970

Description 
The old Quantity Theory of the Value of Money can be expressed
as the "Equation of Exchange," MV=PT, in which M is the quantity of
money, V is the velocity of circulation of money, P is the price level,
and T is the total number of transactions during the period under consideration.
The major shortcoming of the old Quantity Theory was that
velocity (V) was taken to be numerically constant, which it is not.
The new Quantity Theory is a theory of the demand for money as
an asset, productive capital yielding a stream of income in the form
of convenience, security, and so on. According to this theory, people
hold portfolios containing money, bonds, equities, and other assets,
and they adjust their portfolios so that they obtain the maximum returns
therefrom. The demand for money can be expressed in terms of the demand
for other assets (in real terms), the behaviour of the general price
level, people's utility preferences, and their total wealth. Given a
function describing total income, an equation describing the velocity
of circulation of money can be written as the quotient of the income
function divided by the demand for money function. This is the difference
between the new and old Quantity Theories: under the old, the
velocity of money was considered to be a numerical constant; under the
new it is described as a function of income and the demand for money.
In accordance with the above theory, when a monetary disturbance
is introduced by the central bank, people will want to adjust their portfolios in such a way as to compensate for the disturbance. The
initial impact of the monetary disturbance is in the markets for the
most liquid assets: the financial markets. This idea was tested by
correlation analysis on Canadian data of money supply and stock prices
and variants thereof for the years 19241967.
Even after the influence of trend had been removed from the
data, statistical support was found for the above theory, but only
after the influence of random variation had been reduced by sixmonth
moving averaging. However, the evidence—a significant correlation of
.259 between percent change in money and percent change in stock
prices—suggests that monetary change accounts for only about 6.7 percent
of the variation in stock prices. But this conclusion must be tempered
by the realisation that variable lags of the same nature as those that
exist between monetary change and change in the level of business
activity can be expected to exist between monetary change and change in
the level of stock prices. Thus it can be argued that the results of
correlation analysis tend to understate the actual impact of monetary
change on stock prices.

Genre  
Type  
Language 
eng

Date Available 
20120329

Provider 
Vancouver : University of British Columbia Library

Rights 
For noncommercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.

DOI 
10.14288/1.0102447

URI  
Degree  
Program  
Affiliation  
Degree Grantor 
University of British Columbia

Campus  
Scholarly Level 
Graduate

Aggregated Source Repository 
DSpace

Item Media
Item Citations and Data
Rights
For noncommercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use.