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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

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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Bibliographic Info

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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Cited by:
  1. Sellin, Peter, 2001. " Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
  2. Bruce Morley, 2009. "A Comparison of Two Alternative Monetary Approaches to Exchange Rate Determination over the Long-Run," International Econometric Review (IER), Econometric Research Association, vol. 1(2), pages 63-76, April.
  3. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
  4. William Barnett & Yi Liu & Haiyang Xu & Mark Jensen, 2012. "The CAPM Risk Adjustment Needed for Exact Aggregation over Financial Assets," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201215, University of Kansas, Department of Economics, revised Sep 2012.
  5. 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.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  6. 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.
  7. 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.
  8. Levi, Maurice D. & Venezia, Itzhak & Zhang, Yimin, 1996. "The velocity puzzle revisited: The effects of the housing and stock markets," Journal of Economics and Business, Elsevier, vol. 48(1), pages 23-32, February.
  9. Ely, David P. & Robinson, Kenneth J., 1997. "Are stocks a hedge against inflation? International evidence using a long-run approach," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 141-167, February.

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