Monetary expansion and stock returns in Pakistan

This study attempts to examine the causal relationship between money supply and stock prices in Pakistan economy using monthly data from June 1991 to June 1999 and applying Co-integration and Error Correction Models. The Co-integration analysis suggests that, in general, there exist a long run relationship between money supply and stock prices. The Error Correction Model verifies long run relationship between stock prices and M2 and suggests a unidirectional causality running from M2 to stock prices. The model also shows the evidence of short run effects of M2 on stock prices. The analysis suggests that the stock market is not efficient with respect to money supply. (Pak Dev Rev/DÜI)