Money Growth Variability and Stock Returns: An Innovations Accounting Analysis

This paper employs a seven variable vector autoregression system to analyze the effects of money growth variability on British stock returns using the London share price index. Other variables included in the model are M1 money, budget deficits and surpluses, industrial production, consumer price index, and a long term interest error variance decompositions following Sims (1980). The results of the analysis suggest that money growth variability accounts for 22.82% and 19.53% of the variance of interests rates and stock returns respectively, and hence is considered to be an important influence concerning the and uncertainty associated with returns on investment in stocks and other financial assets.E44