Examining How the Changes in Monetary Variables Have Affected Asset Prices

This thesis aims to use changes in expansionary monetary policy in relation to asset prices to determine whether there is causality between key monetary variables and the creation of asset bubbles. The 2008 financial crisis marked the beginning of the Federal Reserve’s shift in monetary policy, and today we see those effects in record-high levels of money supply (M1) and the monetary base (M0) and record low-interest rates. This led to the formulation of my question: Has the change in key monetary variables as a result of policy change led to the creation of an asset bubble? I will explore how recent changes in the Federal Reserve monetary policy like Quantitative Easing and low-interest rate targeting have affected monetary variables such as monetary base and money supply (M1). Subsequently, I will use a series of economic fundamentals to understand their relationship with asset prices before and after the Great Recession. Lastly, I will explore how the resulting changes in monetary variables have affected asset prices since the implementation of inflation rate targeting and Quantitative Easing as a result of the Great Recession.