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The US Monetary Base and Major World Equity Markets: An Empirical Investigation

Author

Listed:
  • Bahram Adrangi

    (University of Portland, 5000 N. Willamette Blvd, Portland, Oregon 97203, U.S.A.)

  • Arjun Chatrath

    (University of Portland, 5000 N. Willamette Blvd, Portland, Oregon 97203, U.S.A.)

  • Joseph Macri

    (Department of Economics, Macquarie University, Sydney, 2109, AUSTRALIA)

  • Kambiz Raffiee

    (College of Business at University of Nevada, Reno, Nevada 89557, U.S.A.)

Abstract

This paper investigates the relationship between the US monetary base and the five largest equity indices of the world. The mainstay of the study is the vector autoregressive approach (VAR). Analyzing impulse response functions shows strong support for the notion that the US monetary base is associated with movements in the major equity markets. For instance, positive shocks to the monetary base in the US, are responsible for positive changes in the world equity markets that may last up to six months. Examining impulse responses of equity indices from a Markov Switching VAR, which takes regime changes into account, confirm these findings. Furthermore, we show that equity responses to the positive shocks to the monetary base may be much higher than those to negative shocks. We conclude the US monetary base, and quantitative easing may have contributed to a positive business and credit climate in advanced economies of the world.

Suggested Citation

  • Bahram Adrangi & Arjun Chatrath & Joseph Macri & Kambiz Raffiee, 2016. "The US Monetary Base and Major World Equity Markets: An Empirical Investigation," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 49-64, August.
    • Handle: RePEc:bap:journl:160304
    Note: This paper benefited from the recommendations of an anonymous reviewer. The remaining errors are the authors' responsibility.
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    More about this item

    Keywords

    Quantitative Easing; Equity Markets; Markov Switching VAR; Granger Causality;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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