A Comparative Policy Analysis on Stock Market, Money

Supply and Interest Rates in US, China and Australia

during 2000 – 2011

DOLY HAN, BRITTANY HARRISON, TENZIN TUSNDU, JENNA BROOKSECO 332

11/30/2013

Introduction Understanding GDP’s relationship to economic variables is

crucial to policy makers Important component in ensuring effective macro-

economic stability policies Stronger Relationship >>> More Attention when

developing policies to grow GDP Comparative Analysis for years 2000-2011 between 1. China 2. United States 3. Australia Why these countries??

Variables Selected

Real Gross Domestic Product Money Supply -----M2 for US & China -----M3 for Australia Stock Market ------Total Share Prices for all shares Discount Rate Gathered from FRED website

Regression Analysis Test1 or -1 = Perfect Correlation ----If correlation is closer to 1 or -1 = Stronger RelationNegatively Correlated >> Variables Have

Inverse EffectIe. If Variable A Increases that causes Variable B to decreasePositively Correlated >>> Variables move

in the same directionIe. If Variable A Increases that causes Variable B to Increase

China GDP’s correlation with Money Supply (M2)=.994 ^^^ Very Strong Positive Correlation GDP’s correlation with Share Price=.596 ^^^ Moderate Positive Correlation GDP’s Correlation with Discount Rate=.144 ^^^ Weak Positive Correlation

2000-0

1-01

2001-01-01

2002-01-01

2003-01-01

2004-0

1-01

2005-01-01

2006-01-01

2007-01-01

2008-0

1-01

2009-01-01

2010-01-01

2011-01-01

-50.0

0.0

50.0

100.0

150.0

200.0Economic Changes in China

GDP % Change M2 % ChangeShare Prices % Change Discount Rate % Change

United States GDP’s correlation with Money Supply (M2)=.898 ^^^ Very Strong Positive Correlation GDP’s correlation with Share Price= .696 ^^^ Strong Positive Correlation GDP’s Correlation with Discount Rate= -.321 ^^^ Weak Negative Correlation

  GDP Money

Supply(M2)

Share

Prices

Federal Fund

Rate

GDP 1      

Money Supply

(M2)

0.8985725

846

1    

Share Prices 0.6968015

196

0.40940654 1  

Federal Fund

Rate

-

0.3214673

51

-0.609667792 0.397731

85

1

Australia GDP’s correlation with Money Supply (M2)=.970 ^^^ Very Strong Positive Correlation GDP’s correlation with Share Price=.699 ^^^ Strong Positive Correlation GDP’s Correlation with Discount Rate= -.156 ^^^ Weak Negative Correlation

2000-01-01

2001-01-01

2002-01-01

2003-01-01

2004-01-01

2005-01-01

2006-01-01

2007-01-01

2008-01-01

2009-01-01

2010-01-01

2011-01-01

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Economic Changes in Australia

GDP % ChangeM2 % ChangeShare Prices % ChangeAustralia Discount Rate

Comparative Analysis of Correlations

GDP & Money Supply

China: .994 Australia: .970 United States: .895

Money Supply is important tool in conducting monetary policy Policies are placed to control money supply to keep GDP growing

ie: US open market operations Why is the United States lower?

Comparative Analysis of Correlations

GDP & Share Prices

China: .596Australia: .699United States: .696

All positive & moderately strong

GDP & Discount Rate

China: .144Australia: -.156United States: -.321

All very weak relationships

Comparative Analysis of Correlations

Discount Rate & Money Supply

China: .064 >>>> Very WeakAustralia: -.273 >>>> WeakUnited States: -.609 >>>> Moderately Strong

Conclusions

More factors play a role but all things held constant all three countries have similar correlations

Evident that some of these macro-economic variables do have strong effects on GDP and play a key role in the stabilization of the economy

When growing GDP--- We assume policymakers would focus a great deal on….

---- Stock market ---- Money Supply (Monetary Policy)

Questions??