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 BROOKS

ECO 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 Test

1 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 decrease

Positively Correlated >>> Variables move in the same direction

Ie. 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

2000-01-0

1

2001-01-0

1

2002-01-0

1

2003-01-0

1

2004-01-0

1

2005-01-0

1

2006-01-0

1

2007-01-0

1

2008-01-0

1

2009-01-0

1

2010-01-0

1

2011-01-0

1-50.0

0.0

50.0

100.0

150.0

200.0

Economic Changes in China

GDP % Change M2 % Change

Share 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: .596

Australia: .699

United States: .696

All positive & moderately strong

GDP & Discount Rate

China: .144

Australia: -.156

United States: -.321

All very weak relationships

Comparative Analysis of Correlations

Discount Rate & Money Supply

China: .064 >>>> Very Weak

Australia: -.273 >>>> Weak

United 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??