This study is concerned with investigating the impact of the monetary policy on the capital markets during the period (1989-2004). Specifically, there are three major objectives of this study: (1) To examine the impact of the money supply on the government bonds and treasury bills (supplies and rates) in Jordan and compare it with Bahrain, (2) To examine the relationship between the treasury bills and the government bonds in Jordan, and (3) To examine the effect of the money supply on the stocks price index in Jordan and compare this impact with the one in Bahrain. To accomplish the objectives of this study, a quantitative approach is employed. The quantitative approach is represented here by the econometric analysis (Time Series Analysis) of documentary secondary data. The research hypotheses were set up to examine the relationship between the money supply and a number of explanatory variables (treasury bills rates and issues, government bonds rates and issues, and stock price index). These hypotheses were tested using time series analysis (VAR method). The analysis was conducted for two countries: Jordan and Bahrain. The data covered the period (1989-2004) monthly data in Jordan, and 2000:9-2004:12) in Bahrain. The tests that have been used in this research in VAR model will include: selection of the lag length, unit root test, granger causality test, variance decomposition, and impulse response function. These tests will be examined by using Eviews (release 5.0) package and RATS (Regression Analysis of Time Series (release 6.0) software. The findings in Jordan revealed that there isn't any relationship between the money supply and the treasury bills rates and government bonds rates. However, there is a positive relationship between the money supply and issuance of the treasury bills and the government bonds. These findings lead to the quantity adjustment in the absence of the price adjustment. Moreover, the results indicate that there is a significant negative relationship between the treasury bills issuance and the government bonds issuance. And the last result in Jordan concluded that there is a positive relationship between the money supply and the stock price index. The finding in Bahrain were different from the findings in Jordan because of the difference in the financial system in the two countries, as Bahrain follows an Islamic financial system whereas Jordan's finanacial system is not an Islamic one. The prohibition of the interst rate in some cases in Bahrain and that Bahrain's economy is more open economy would lead to the conclusion that there isn't any relationship between the money supply and the stock market index and the money market instruments (treasury bills) and that it follows international capital flow adjustment. Also, it is important to mention that Bahrain Monetary Agency has issued Islamic instruments (long and short-term sukuk) beside the conventional instruments.