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This article presents results of tests on two related hypotheses on money supply. The first relates to an unresolved issue of money endogeneity while the second centres on the yet-explored relationship between money supply and bank stock returns if money is found to be endogenous. Our results, using long-horizon data of Group of Seven (G-7) economies, supports causality in money supply as running from bank lending to bank deposits, a result that is predicted by the post-Keynesian money supply endogeneity (bank-credit-driven) theory. Thus, the result is not consistent with exogeneity proposition. A new evidence of positive relationship between endogenous money supply and aggregate bank stock return is statistically significant on this hitherto unexplored topic. These findings are consistent with the post-Keynesian money supply theory and the dividend valuation theory, which predicts money supply changes to induce changes in bank earnings, so bank share prices change.money supply endogeneity, bank stock returns, credit market, liquidity provision, post-Keynesian theory, dividend valuation theory, G-7 countries,

This paper investigates the nature of money supply in Australia over two separate monetary policy regimes: monetary and inflation targeting. The post-Keynesian theory on endogenous money was tested with the aim of investigating whether endogenous money supply, if it did exist, followed the accomodationist, structuralist or liquidity preference viewpoints. Data used are quarterly series from 1977 to 2007 and we used vector error-correction model for long-run and short-run causality tests. We found that money supply is endogenous in Australia even when the central bank targeted monetary aggregates during the period 1977 to 1993.

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