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Relationship Between Money Supply And Stock Price Economics Essay

‘Unexpected changes in money supply and stock returns are inversely related’. Discuss the process through which money supply may affect stock prices and critically assess the empirical validity of this statement with the help of evidence available in the literature.
Stock returns reflect investor expectations about corporate performance in terms of earnings, cash flow and required rate of return. They are one of the better leading indicator series in any economy and react to various leading indicator series like corporate profit margin, interest rate and money supply. (Keith

History Of The European Monetary Union Economics Essay

Introduction It has been almost 6 years since the euro was first introduced in 12 member states of the European Union on 1 January 2002. This date has left its mark in the European history and the entire world because it’s the finalization with success of a very hard work initiated in Maastricht ten years earlier by the EU member states. Today, over 300 million Europeans use the euro as their currency and this number is to be increased widely in the coming years following the enlargement of the European Union to 27 countries. In these years euro has become also a recognized international currency that enjoys the kind of stability in today’s global market. However, all this success of the euro as a stable currency has made notable changes in the economies of the EU countries that began to plan this event a little bit after the unification of the European Market in order to compete successfully in global markets. Also today after these years of Euro land we can also take our view regarding the success of the new currency and evaluate it based on facts and evidences.
A brief history of EMU There is no doubt that the first embryo of European Monetary Union was the theory of Optimum Currency Areas developed by R. Mundell in 1961 and R. McKinnon in 1963. It was the first work that saved as model for the European Monetary System (EMS), which had provided the framework for the moves to Economic and Monetary
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Union. Following the good path of European Community, in 1970 was established the Werner Committee in order to prepare the right economic environment for the monetary unification of the European Community. Although the EC countries supported this committee initially, it failed to pursue its goals and in1979 led the way to European Monetary System (EMS). At this stage began the real efforts of the EC12 for the formation of the EMU. This stage includes a lot of agreements that European Community countries managed. Another milestone in the history of EMU is the Delors report prepared by Jacques Delors and presented in Madrid Summit in June 1989. His work leaded to the Maastricht treaty, which established the essential rules for the EMU. After its ratification in 1993 the way to the currency Unification was opened and clears for every European Union country. Monetary Union started in 1999 and for the first time in 2002 euro notes and coins were introduced finalizing the work of many decades.
Optimum Currency Area (OCA) R. Mundell in 1961 and R. McKinnon in 1963 developed optimum Currency Area theory that is the model for the European Monetary System. This theory relates to a group of nations with currencies linked through permanently fixed exchange rates. The thing that makes this an optimum arrangement is that the currencies of the optimum currency area can float jointly against those of non-members. This removes exchange rate uncertainty, price stability, trade and investment. The downside of an OCA is that individual members cannot act independent economic policies for macroeconomic stabilization and growth since this would destabilize the fixed exchange rates. Hoxha 3
Creation of European Monetary Union (EMU) When the Treaty of Rome was first signet by 6 European countries they did not seek Economic and Monetary Union but by the late 1960s and beginning 1970s, with the European Community well established, with already free tariffs and quotas, and the collapse of Bretton Woods system which retained gold as the ultimate source of value and dollar the only directly tied currency, they saw the possibility of a single currency and monetary union. Even thought this was only a good idea and achieving this new objective was very hard for the EC at that time, because their economic performance, exchange rates and inflations were very different. At the beginning different views were launched by member states of EC in order to achieve the monetary unification and in order to resolve this problem was established the Werner Committee. It proposed the European Monetary Union, which included a number of stages to be followed in order to reach their goal of a single currency. The Werner Report contained a detailed description of the establishment of economic and monetary union in three stages up to 1980. The countries were gradually to increase the coordination of their economic policies and reduce exchange rate fluctuations. At the final stage exchange rates were to be locked irrevocably. In addition to a common monetary policy these plans also entailed that a number of fiscal-policy decisions were to be made jointly. However, the first plans for economic and monetary union were never realized because most EC members didn’t maintain the narrow margins of fluctuations. The desire to promote greater economic integration of the EC-12 and coordinate their economic policies in controlling the inflation led the German Chancellor Helmut Schmidt and the French President Valery Giscard d`Estaing first to propose the European Monetary System (EMS) in 1978. A very
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important role and decisive role in the fast Evolution of EMS gave the Single European Act. In the single market, goods, services, labor and capital had to move freely between member states in the same way as in the participating countries’ domestic markets. The single market was aimed at promoting higher growth and lower prices through enhanced competition. To obtain the full effect of the single market, i.e. a large “domestic market” covering the entire EC, the provisions also contained a reference to economic and monetary union. However, it was not specified how this was to be introduced.
The main components of the EMS which was a very complex system are: first the European Currency Union (ECU), second and the most important of all is Exchange Rate Mechanism (ERM), third the Financial Support Mechanism (FSM), and the fourth and the last is the European Monetary Cooperation Fund (EMCF). The ECU was described as a basket of all EU currencies, the amount of each weighted according to its country’s share of EU GDP (Baldwin