The effect of monetary growth variability on the Indonesian capital market

D. Agus Harjito, Bany Ariffin Amin Nordin, Ahmad Raflis Cheomar

Research output: Contribution to journalArticle

Abstract

Over the years studies to ascertain the relationship between money supply growth and stock prices have been carried out in abundant. However, very few researchers have paid attention to the impact of uncertainty in monetary growth on stock prices. The element of uncertainty on monetary growth, is noted by scholars to increase perceived riskiness of the financial assets, and this in a way will have a detrimental effect on stock prices. By adopting commonly used econometric tools, this study is designed to determine the relationship between these two variables in a developing market (i.e. Indonesia). Contrary to the proposed hypothesis, uncertainty in monetary growth is found to have no influence on stock prices. However uncertainty in monetary growth seems to have a significant long-run dynamic relationship with the uncertainty in stock prices. Such relationship discovery on the Indonesian Stock Market has several implications. First, with respect to stock market investors since past information of monetary growth uncertainty does not seem to influence the contemporary stock prices, it nonetheless is consistent with the concept of efficient market. Therefore no trading strategy can be developed based on money growth uncertainty information. On the other hand, because money growth uncertainty does influence the stock market that proxies the economy in the long run, attention of the policy makers should be focused on how the monetary policy is conducted. Friedman (1983, 1984) did mention about the detrimental effect of monetary growth uncertainty. For the policy makers of the country, unless something is done to remedy the situation, the disaster of 1979-1982 brought upon by a monetary experiment could occur in this country as well.

Original languageEnglish
Pages (from-to)116-124
Number of pages9
JournalInvestment Management and Financial Innovations
Volume3
Issue number2
Publication statusPublished - 2006

Fingerprint

Capital markets
Uncertainty
Stock prices
Stock market
Politicians
Money growth
Trading strategies
Money supply
Experiment
Disaster
Indonesia
Financial assets
Efficient markets
Monetary policy
Investors
Riskiness
Information uncertainty
Remedies
Econometrics

Keywords

  • Monetary growth
  • Money supply growth
  • Stock prices

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

The effect of monetary growth variability on the Indonesian capital market. / Harjito, D. Agus; Amin Nordin, Bany Ariffin; Cheomar, Ahmad Raflis.

In: Investment Management and Financial Innovations, Vol. 3, No. 2, 2006, p. 116-124.

Research output: Contribution to journalArticle

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