The Velocity of Money and the Stock Market. A Comparative Forward and Backward Analysis

Abstract

This study applied the panel autoregressive distributed lag (ARDL) model to examine the forward and backward relationships between the velocity of money and the traded stocks in samples of economies varies in term of the level of money supply relative to nominal GDP and the level of economic development during the period 2000-2019. The empirical findings show differentiated mutual relationships and degrees of response between the velocity of money and the value of traded stocks for each level of money supply relative to GDP and each level of economic development. For developed economics, the value of traded stocks highly and positively responds to the velocity of money and the velocity of money encourages the value of traded stocks. The degree of the positive response of the value of traded stocks to the velocity of money is relatively low in developing economies, and the value of traded stocks discourages the velocity of money in these economies. The response of the value of traded stocks to the velocity of money is negative in economies with high levels of money supply relative to their nominal GDP; the velocity of money negatively affects the value of traded stocks. As long as the level of the money supply is lying beneath the level of nominal GDP, the value of traded stocks responds positively and highly to the velocity of money. Finally, the effect of the velocity of money on the traded stocks is much stronger than the effect of traded stocks on the velocity of money.