The relationship between the US broad money supply and US GDP for the time period 2001 to 2019 with that of the corresponding time series for US national property and stock market indices, using an information entropy methodology

TL;DR

This study examines the relationship between US broad money supply, GDP, and major asset indices from 2001 to 2019 using an information entropy approach, revealing that money supply growth significantly influences asset index growth.

Contribution

It applies an information entropy methodology to analyze the links between money supply, GDP, and asset indices over an extended period, highlighting the dominant role of money supply growth.

Findings

US GDP grew exponentially with a 2% annual rate.

US broad money supply grew at 5.7% annually, faster than GDP.

Asset indices, especially Russell 2000 and NASDAQ, are influenced by money supply and GDP.

Abstract

The primary objective of this paper was to investigate whether the growth in the major US asset indices could be a function of the US broad money supply and/or US GDP, over the time period 2001 to 2019, using an information entropy methodology. The four US asset indices investigated were: (1) US National Property index; (2) Russell 2000 index; (3) S&P 500 index; and (4) NASDAQ index. Notwithstanding the financial crisis of 2007-2008, US real GDP increased exponentially over the period 2001 to 2019, with an average annual growth rate of approximately 2%. However, over this time period, the average annual rate of growth of US GDP was considerably lower than the average annual rate of growth of the US broad money supply (5.7%). The main determinant of the average growth rate for all four US asset indices studied would appear to be the growth rate in the US broad money supply. In addition, the growth rate in the US Russell 2000 stock index and the NASDAQ index would appear to be a function of the combined positive effects of both the growth rate in the US Broad Money Supply and the growth rate of US GDP.