Money supply endogeneity and bank stock returns

• Autores: Z. E. Badarudin, Mohamed Ariff, A. M. Khalid
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 21, Nº. 13-15, 2011, págs. 1035-1048
• Idioma: inglés
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• Resumen

  • This article presents results of tests on two related hypotheses on money supply. The first relates to an unresolved issue of money endogeneity while the second centres on the yet-explored relationship between money supply and bank stock returns if money is found to be endogenous. Our results, using long-horizon data of Group of Seven (G-7) economies, supports causality in money supply as running from bank lending to bank deposits, a result that is predicted by the post-Keynesian money supply endogeneity (bank-credit-driven) theory. Thus, the result is not consistent with exogeneity proposition. A new evidence of positive relationship between endogenous money supply and aggregate bank stock return is statistically significant on this hitherto unexplored topic. These findings are consistent with the post-Keynesian money supply theory and the dividend valuation theory, which predicts money supply changes to induce changes in bank earnings, so bank share prices change.