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Expected Equity Returns and the Demand for Money

Listed author(s):
  • Stern Liliana V

    ()

    (Auburn University)

  • Stern Michael L.

    ()

    (Auburn University)

This paper investigates the role of equity markets in the determination of money demand. Expected equity returns are found to be significant determinants of money demand in the long run. We also uncover a strong positive drift in the elasticity of money demand with respect to expected equity returns. Moreover, this elasticity has recently become positive. We explain the puzzle of positive interest elasticity by modifying a conventional model of money demand. We show that if equities are also allowed to provide some liquidity, then the model can support both positive and negative elasticities with respect to expected returns.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 8 (2008)
Issue (Month): 1 (June)
Pages: 1-29

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Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:18
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  1. Reynard, Samuel, 2004. "Financial market participation and the apparent instability of money demand," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1297-1317, September.
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  10. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  11. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
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