The Money Multiplier and Asset Returns
Posted: 19 Jan 2017 Last revised: 12 Mar 2018
Date Written: January 25, 2017
Abstract
In this paper I study the relationship between aggregate money balances and subsequent stock and bond returns. I find that levels of broad money multipliers (the ratios of broad money to narrow money) forecast future returns with a negative sign, while changes in these multipliers forecast returns with a positive sign. These findings indicate that levels of multipliers are pro-cyclical: like the P/D ratio, they tend to be high at times of low expected returns. The dynamics of these multipliers may also indicate changes in the volume of financial intermediation and the level of net leverage, consistent with credit-cycle theories of macroeconomic fluctuations.
Keywords: money multiplier, money supply, return predictability, stocks, bonds, credit, leverage
Suggested Citation: Suggested Citation