Abstract
Using the longest spanning monthly data ever studied in the empirical literature, dating back to 1870, we investigate the relationship between the money supply and the stock market in the United Kingdom. In the context of bivariate and multivariate structural generalized autoregressive conditional heteroskedasticity (GARCH)-in-Mean VAR models, we document that increased money growth volatility has significant negative effects on the stock market. Our results are broadly consistent with the empirical literature and provide conclusive evidence that increased uncertainty about the growth rate of money, has a negative and statistically significant effect on economic activity. Also, accounting for money growth uncertainty, we find that an unanticipated increase (decrease) in money growth leads to fall (rise) in the unemployment rate and the interest rate and to a rise (fall) in share prices.
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