Abstract

This paper aims to use the Cointegration to analyze the relationship of money Supply and Saudi Stock Price Index (SSPI) using different measure of money supply M1 and M2 and different time series; annual data from 1985 until 2012 and monthly data from 2000 until 2013. The goal is to discover the relationship between SSPI and MS and to identify the long run as well as the short run causality using Vector Error Correction Model (VECM). The most important finding is the confirmation of long run relationship between M1 and SSPI as well as M2 and SSPI in both monthly and yearly data. The study has found that the long run causality is running from SSPI to M1 for annual data but not the other way around. This finding supports the Post-Keynesian theoretical approach which indicates the endogeneity of MS. Moreover, the result is consistent with efficient stock markets hypothesis since MS does not affect the SSPI in the long run. The implication of this result is that Saudi Arabian Monetary agency as well as commercial banks cannot affect the Saudi Stock prices through change in MS. This paper assures bidirectional short run causal relationship (or feedback effect) between SSPI and M1 by using annual data. The paper has not found neither long run nor short run causal relationship between SSPI and M2 with annual data. Furthermore, the study could not prove any long run or short run causality between M1 and SSPI or between M2 and SSPI through the use of monthly data.

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