The Covid-19 Stock Market Puzzle and Money Supply in the US

Abstract

In the first five months of 2020 industrial production in the US fell 15% due to the Covid-19 shut down. At the same time the S&P500 stock market index first dropped by 30% and then recovered to almost pre-crisis levels. This seems puzzling as the most severe economic recession in nearly a century unfolds. However, central banks have supported financial markets with unprecedented money supply and this might explain the observed stock market resilience. Within a cointegration framework, we estimate the relation between macroeconomic variables and the US stock market. Results show that approximately half of the stock market recovery can be attributed to the increase in money supply.

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The Author retains the right to reuse or reproduce all work accepted for publication at the Economics Bulletin in any form he chooses subject to the sole condition that proper acknowledgment is made of its prior publication in Economics Bulletin.

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http://hdl.handle.net/1893/32175