Money, Interest Rate, and Stock Prices: New Evidence from Singapore and the United States

Abstract

This paper examines the long- run equilibrium relationships between the major stock indices of Singapore and the United States and selected macroeconomic variables by means of time series data for the period January 1982 to December 2002. The results of various cointegration tests suggest that Singapore’s stock prices generally display a long- run equilibrium relationship with interest rate and money supply (M1) but the same type of relationship does not hold for the United States. To capture the short-run dynamics of the evolving relationship between stock indices and macroeconomic variables, we apply the same methodology for different subsets of data covering shorter time periods. It is found that before the Asian Crisis of 1997, stock markets in Singapore moved in tandem with interest rate and money supply, but this pattern was not observed after the crisis. In the United States, stock prices were strongly cointegrated with macroeconomic variables before the 1987 equity crisis but the relationship was impaired thereafter and eventually disappeared with the onset of 1997 Asian Crisis. Finally, the results of Granger causality tests uncover some systematic causal relationships implying that stock market performance might be a good gauge for Central Bank’s monetary policy adjustment.

Keywords: Macroeconomic variables, Cointegration tests, Stock prices, Singapore, United States