Equity Markets, the Money Market, and Long-Run Monetary Neutrality
AbstractThis paper outlines a process for teaching long-run neutrality of money, drawing an analogy between equity markets and the money market. The key points in the discussion include the following: (1) What is the price of money? (2) Why does the long-run demand for money trace out a rectangular hyperbola? (3) Why does the slow adjustment of goods and service prices to changes in the stock of money lead to a different short-run demand for money? and (4) Why does a successful currency reform generate similar short-run movements in the price of money as movements in equity share prices after a change in the supply of shares? I have used this approach successfully for over 30 years at all levels, wherever I need to discuss the money market in a macroeconomic model.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-22.
Length: 15 pages
Date of creation: Jul 2005
Date of revision:
Publication status: Published in International Review of Economics Education, June 2010.
Note: I gratefully acknowledge the comments and suggestions of W. McEachern and R. Cronovich.
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