MONEY, STOCK PRICES AND ECONOMIC ACTIVITY IN SELECTED EUROPEAN COUNTRIES
AbstractThe behavior of stock market prices and macroeconomic variables are a subject of investigations both of
policymakers and also economists. This paper is concerned with causal linkages among money supply, output
and stock price development in the selected European countries. The main objective is to investigate and
evaluate long-run equilibrium relationships between macroeconomic variables and stock prices as well as shortrun
dynamics using both the Vector Autoregressive (VAR) and Vector Error Correction (VEC) models in the
analyzed countries. The emphasis of this paper in addition to evidence presented is garnered from the Euro-area
and six EU-counties: the Czech Republic, Poland, Slovak Republic, Austria, Germany and the United Kingdom.
Money supply M2, national stock market indices and real gross domestic product are used in this study. In the
analysis, quarterly data in the sample period from 1995:Q1 to 2011:Q2 has been applied. We have applied tests
for stationarity and co-integration and it has been discovered that there is a long-run co-integration relationship
between money supply, stock prices and output. We have estimated both a VAR model and VEC model, and we
have also generated impulse-response functions from the estimated VAR models, along with comparing the
usefulness of VAR and VEC models for the real gross domestic product growth modelling. The evidence
obtained from the analysis of time series suggests that in all cases we can discover the long-run relationships
among variables applied. Money supply and stock market development have a certain predictive content for the
real economic activity. When considering the results of the short-run analyses, we have to accept the great
differences among countries. Based on the results of comparisons and evaluations of the VEC and the VAR
models, we may state that VEC models are significantly better when the co-integrating relationships are
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