The Effect of U.S. Monetary Liquidity Growth on the Stock Price Index

Motahar Safaei; Shadi Shahverdiani; Sara  Yousefzadeh; Artin  Beytari

Authors

Motahar Safaei Department of Accounting, ShQ.C., Islamic Azad University, Shahr-e Qods, Iran Author https://orcid.org/0009-0001-8239-4001
Shadi Shahverdiani Department of Accounting, ShQ.C., Islamic Azad University, Shahr-e Qods, Iran https://orcid.org/0000-0002-4985-0685
Sara Yousefzadeh Department of Accounting, ShQ.C., Islamic Azad University, Shahr-e Qods, Iran Author https://orcid.org/0009-0006-0873-2814
Artin Beytari Department of Accounting, ShQ.C., Islamic Azad University, Shahr-e Qods, Iran Author https://orcid.org/0009-0006-8609-0482

Keywords:

liquidity growth, S&P 500 index, stock market, price bubble, monetary policy, econometrics

Abstract

In recent years, the growth of U.S. monetary liquidity has been recognized as one of the key factors influencing fluctuations in asset markets and stock indices, and examining the relationship between monetary policy and the prices of risky assets has become particularly important for investors, researchers, and policymakers. The purpose of this study was to analyze the effect of U.S. monetary liquidity growth on the S&P 500 stock price index over the period from 2016 to 2024 and to examine the statistical significance of this relationship. To achieve the research objectives, a causal-comparative research design was employed, and secondary monthly data were collected from reputable economic and financial sources, including the Federal Reserve Economic Data (FRED) database and Yahoo Finance. The statistical population consisted of all monthly observations of monetary liquidity growth and the S&P 500 stock price index during the specified period, yielding a sample of 108 observations. The data were analyzed using fixed-effects panel models and the Estimated Generalized Least Squares (EGLS) method. Chow, Hausman, F-Limer, and Durbin-Watson tests were also applied to ensure the validity of the estimates and to control for heteroskedasticity and autocorrelation. The results indicated that U.S. monetary liquidity growth had a positive and statistically significant effect on the S&P 500 stock price index, and the main research hypothesis was supported at the 95% confidence level. Specifically, the coefficient of the independent variable was 0.32, with a t-statistic of 20.72, and the model explained approximately 78% of the variation in the stock index. By providing precise empirical evidence, this study clarifies the effect of monetary liquidity growth on the stock index. Furthermore, the application of a fixed-effects panel model and the EGLS method enhances the scientific validity of the data analysis, while the findings provide important practical insights for investors and policymakers regarding liquidity management, reduction of market volatility, and prevention of price bubbles in risky asset markets.

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