MONEY, STOCK PRICES AND ECONOMIC ACTIVITY IN SELECTED EUROPEAN COUNTRIES
Abstract
The behavior of stock market prices and macroeconomic variables are a subject of investigations both ofpolicymakers 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
enforced.
The Copyright Transfer Form to ASERS Publishing (The Publisher)
This form refers to the manuscript, which an author(s) was accepted for publication and was signed by all the authors.
The undersigned Author(s) of the above-mentioned Paper here transfer any and all copyright-rights in and to The Paper to The Publisher. The Author(s) warrants that The Paper is based on their original work and that the undersigned has the power and authority to make and execute this assignment. It is the author's responsibility to obtain written permission to quote material that has been previously published in any form. The Publisher recognizes the retained rights noted below and grants to the above authors and employers for whom the work performed royalty-free permission to reuse their materials below. Authors may reuse all or portions of the above Paper in other works, excepting the publication of the paper in the same form. Authors may reproduce or authorize others to reproduce the above Paper for the Author's personal use or for internal company use, provided that the source and The Publisher copyright notice are mentioned, that the copies are not used in any way that implies The Publisher endorsement of a product or service of an employer, and that the copies are not offered for sale as such. Authors are permitted to grant third party requests for reprinting, republishing or other types of reuse. The Authors may make limited distribution of all or portions of the above Paper prior to publication if they inform The Publisher of the nature and extent of such limited distribution prior there to. Authors retain all proprietary rights in any process, procedure, or article of manufacture described in The Paper. This agreement becomes null and void if and only if the above paper is not accepted and published by The Publisher, or is with drawn by the author(s) before acceptance by the Publisher.