Expected Equity Returns and the Demand for Money
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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Volume (Year): 8 (2008)
Issue (Month): 1 (June)
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