Monetary Shocks

Information Management and Business Review Vol. 2, No. 6, pp. 246-251, June 2011 Monetary Shocks or Real Shocks, Which matters the most for Share Prices Muhammad Imtiaz Subhani, Amber Osman Iqra University Research Centre-IURC, Iqra University-IU, Karachi – Pakistan amber.osman@yahoo.com Abstract: This study examines that out of monetary shocks (∆M2) and real shocks in share prices (∆Yt-k), which one or both really explain share prices of Karachi stock exchange 100 index. The time series econometrics is used to investigate the data for the monthly period of January 1991 to January 2011 for money supply (M2) and share prices of KSE 100 index. The results of unit root test reveal that there is a real shock in share prices and it explains the share price of KSE 100 index temporarily, while Vector auto regression revealed that Share prices of KSE 100 index is meagerly explained by the monetary shocks. Key Words: Share Prices, Real Shocks, Monetary Shocks, Unit Root Test, Granger Causality Test___________________ 1. Introduction For several years, the economic effect of the supply of money on share prices has been argued in the literature of economics. This subject has retrieved acceptance and admirations in the rouse of recent share market volatility in the United States. This unpredictability has compelled many policy makers to ponder over it since 1987 share market crash. The crash was witnessed all through world's financial markets. Credit and trade good markets experienced strong strokes in response. The crash and its stroke have lifted the question of, if moderating volatility in share prices through some ways can be possible. A dialogue has emerged concerning the mechanics of monetary policy and potential interposing actions by the State Bank Pakistan ready to foreclose a share market crisis alike to that of 1987 in US. In past researches there were numbers of variables investigated which may and may not explain the share prices of different share markets but the...