Money Supply and Equity Market Performance Since 2007

Financial market observers, investment bankers chief among them, have long theorized about the relationship between the growth in the money supply and the performance of equity markets. Here’s an empirical update on the discussion.

Money Supply Growth

The first chart below shows the growth in money supply by country since 2007, as measured by M2.  As a brief reminder or introduction, M2 is the sum of total currency in circulation and in bank vaults, bank reserves, traveler’s checks, demand deposits, checkable deposits, savings deposits, and time deposits.  All numbers are in local currency; some countries were excluded due to lacking data.

On top in the money supply expansion game is Venezeula, with an overall growth of 867%.  The next largest expander has been Azerbaijan at 755%, followed by Ghana at 583%, Mongolia at 558%, Bolivia at 455%, Iraq at 377%, and Argentina at 354%.

On the bottom, the most prudent of central banks includes Portugal, with a growth in assets since 2007 of just 2.2%.  Portugal is followed by Ireland at 2.9%, Greece at 4.1%, Luxembourg at 13.7%, and El Salvador at 16.8%.

money suply

Growth in Equity Market Values

With the growth in money supply as the first side of the coin, the other side is the growth in equity prices.  Here’s the look at the performance of equity markets, by country, over the same period, 2007 – 2014.

On top in the equity market appreciation game since 2007 is the national exchange of Iran, with total appreciation of 670%.  The other four of the top five performing national equity markets include Argentina at 237%, Indonesia at 177%, Philippines at 121%, and Thailand at 116%.

On the other end, the top 5 poorest performing equity markets since 2007 include Botswana at -98%, Cyprus at -74%, Greece at -58%, Kazakhstan at 58%, and Macedonia at -56%.


Putting the Two Together

With the two components addressed, here’s the connection between the expansion in money supply and the performance of equity markets.

The scatterplot graphic shows the correlation between the two, with each dot representing a country month.  The plot is from 2007 to year-to-date 2014. The positive and statistically significant regression line indicates that as a given country’s money supply increases, so does the given country’s equity markets.

As a caveat, all numbers are in local currency values.  Increases in a country’s money supply certainly affects other variables, including inflation and exchange rates.  A more complete analysis may want to include these factors.  With this caveat taken into account, the main conclusion still stands – money supply increase are generally correlated with equity market appreciation.

Interestingly, the correlation coefficient comes out to 0.28, meaning that a 1% increase in the money supply is correlated with a 0.28% increase in a given country’s equity market.



Overall, in inspecting the relationship between the growth in money supply and the performance of equity markets, it certainly appears as though the two are connected.  Of course, before arriving at a complete conclusion, other variables may need to be included, including country inflation and exchange rate changes.

With the caveat that correlation does not imply causation, one could presume, simply based on correlation and common sense, that when central banks start getting serious about reducing the money supply (if they ever do), equity markets would be one of the first areas where the effects would be felt.

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