Vietnamese Money Supply M1 and Stock Price Behavior

Abstract

This study applies Enders and Siklos’ (2001) procedure to test for the long-run asymmetric co-integrating relationship and Granger causality between Vietnamese monthly money supply M₁ and monthly equity index over the period July 2000 to August 2010. The empirical results suggest a long-run asymmetric co-integration relationship between the narrowly defined money supply and equity index, indicating that the countercyclical monetary policies affect investors differently in different phases of business cycles. The empirical results further suggest that Vietnamese equity investors are more responsive to contractionary than expansionary monetary policy measures. Thus, the Vietnamese Central Bank countercyclical monetary policy is effective in influencing the equity markets. The empirical findings should be of special interest for the Central Bank in formulating and implementing its countercyclical monetary policy, for equity investors in designing their investment strategies, and corporate executives in determining their capital structures.