How Do Broad Money and the Stock Market Interact in Times of Crisis and of Calm?

David Cronin

Published: September 2021

The relationship between the components of the US M2 money stock and the US stock market, represented by the Wilshire Index, between 1980 and early 2021 is considered. Consistent with retail money funds (RMFs) acting as a ‘gateway’ for portfolio adjustment, the results indicate the stock market having a particularly strong influence on RMF behaviour during periods of economic and financial crisis, including since the economic effects of the COVID-19 pandemic took hold. The analysis also shows developments in the M1 stock having a very large influence on M2 deposits behaviour since September 2008 (the month of the Lehman Brothers collapse). This may be attributable to a preference among the public for more liquid forms of money in an era of low interest risk and sudden episodes of financial instability. These results point to the public’s desire to hold liquid assets at times of financial uncertainty and low interest rates having a substantial effect on US money developments.

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