An Empirical Analysis of the Effect of Stock Prices on the Money Multiplier in China

This article first presents theoretical analysis on the channels through which the stock prices influence the money multiplier. Our study on the three influence channels, namely excess reserve ratio, the ratio of cash in circulation to checkable deposits and the ratio of the sum of savings and time deposits to checkable deposits is then verified by empirical analysis based on unit root tests and co-integration tests. By creating co-integration models and vector error correction models, we further examine both the short-term and the long-term effects of stock prices on the money multiplier. From the analyses we conclude that changes in stock prices can affect the effectiveness of macroeconomic policies in China by influencing the money multiplier which in turn influences the money supply. Therefore, this effect shall be taken into consideration in the decisions of future macro monetary policy