As stock returns and Monetary Growth Scissors constitute a primary economic variable, their price fluctuations exert significant influence on the global economy and financial markets. Consequently, analyzing the co-movement and causal relationships between Monetary Growth Scissors and stock returns holds substantial practical significance. This study employs three time-varying Granger causality tests to validate the causal relationship between Monetary Growth Scissors and stock returns. We analyze the period from February 2014 to January 2024 for Monetary Growth Scissors and stock returns. Our findings are as follows: First, in this study, to investigate the causal relationship between M2-M1 and stock returns, we employed three time-varying Granger causality tests. The recursive evolution method proposed by Shi et al. (2018) demonstrated the best finite sample performance, followed by Swanson’s (1998) rolling window algorithm. Second, we also found evidence of bilateral contagion effects between the M2-M1 and stock returns. Third, under the assumptions of either homoscedasticity or heteroscedasticity, from 2015 to 2024, the causal relationship persists, and the null hypothesis of no Granger causality from M2-M1 to stocks can be rejected. We also found that the time-varying Granger causality relationship from stock returns to M2-M1 was only significant from late 2015 to 2016.
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