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Money Demand and the Stock Market in a General Equilibrium Model with Variable Velocity

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Boyle, Glenn W

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Abstract

A monetary model of asset pricing is used to explain observed correlations between money velocity and stock prices. Output shocks cause velocity and nominal stock prices to move in opposite directions, but may cause velocity and deflated stock prices to move in the same direction. Although monetary shocks are neutral, changes in monetary expectations have real effects because of their impact on the expected purchasing power of money balances carried into the future. Thus, changes in expected monetary growth alter expected real equity returns and inflation, and changes in monetary uncertainty alter the equity risk premium. Copyright 1990 by University of Chicago Press.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 98 (1990)
Issue (Month): 5 (October)
Pages: 1039-53
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Handle: RePEc:ucp:jpolec:v:98:y:1990:i:5:p:1039-53

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  1. Ramsey, J.B. & Lampart, C., 1997. "The Decomposition of Economic Relationships by Time Scale Using Wavelets," Working Papers 97-08, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  2. Paul, Satya & Mallik, Girijasankar, 2003. "Macroeconomic Factors and Bank and Finance Stock Prices: The Australian Experience," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 33(1), pages 23-30, March. [Downloadable!]
  3. Simon J. Broome & Morley, B., 2003. "Stock Prices and the Monetary Model of Exchange Rate: An Empirical Investigation," Economics, Finance and Accounting Department Working Paper Series n1321103, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
  4. Ralph Chami & Thomas F. Cosimano & Connel Fullenkamp, 2001. "Capital Trading, Stock Trading, and the Inflation Tax on Equity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 575-606, July. [Downloadable!] (restricted)
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