Money supply endogeneity and bank stock returns
Date of this Version
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.
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