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Money supply, opinion dispersion, and stock prices

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  • Hirota, Shinichi

Abstract

This study develops a simple model that shows how money matters in the determination of stock prices. When investors have different opinions on the stock's value and face market frictions, the money supply in an economy influences the demand for stocks and hence positively affects stock prices. Unlike the discounted-cash-flow model, the present model indicates that stock prices routinely depart from the fundamentals; overpricing or underpricing occurs depending on the amount of money in the economy. The results of the model suggest that stock prices fluctuate because of money supply changes and that monetary policy may cause a disconnect between the stock market and the real economy.

Suggested Citation

  • Hirota, Shinichi, 2023. "Money supply, opinion dispersion, and stock prices," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 1286-1310.
    • Handle: RePEc:eee:jeborg:v:212:y:2023:i:c:p:1286-1310
    DOI: 10.1016/j.jebo.2023.06.014
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    More about this item

    Keywords

    Stock price; Money supply; Opinion dispersion; Monetary policy; Stock return; Overpricing;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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