Can the Quantity Theory Be Used to Predict Stock Prices: Or Is the Stock Market Efficient?

Abstract

Since changing monetary growth establishes incentives to either acquire or expend liquidity, it is not surprising that changes in money exert a direct influence on stock market fluctuations. Furthermore, the indirect effects of monetary change are even more dramatic and influential. Monetarists argue that monetary growth is the major variable influencing trends in corporate profits and interest rates. Expectations concerning inflation, hence interest rates, and corporate earnings exert a major influence on equity prices.... Rising inflationary expectations cause higher interest rates as does the short-run impact of a tighter monetary policy, and these influences depress equity prices.... Lower interest rates exert a Bullish influence on common stock prices.