The causal relationship between money supply and the stock price index In the Amman Stock Exchange (Jordan)

Abstract

This study aims at examining and analyzing the causal relationship between money supply (M2) and stock price index (SPI) in Amman Stock Exchange, during the period (1978-2014). To achieve this goal, the cointegration method has been employed to test for a relationship between the two variables, the vector enor correction model, in order to reveal the causal relationship, and the separation of this relationship in the long term and short term. The study showed that (SPI) is cointegrated positively with (M2). also, as evidenced by the existence of unidirectional causality from the money supply to stock price index in the long term. These results, in general, support the Monetary Portfolio Hypothesis, but are not in line with the Efficient Markets Hypothesis. So, the study recommends that policy makers need to take into consideration the effects of the change in money supply on the stock prices index, as well as interest in all things that would raise the efficiency of the Amman Stock Exchange