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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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  • Boyle, Glenn W, 1990. "Money Demand and the Stock Market in a General Equilibrium Model with Variable Velocity," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1039-1053, October.
    • Handle: RePEc:ucp:jpolec:v:98:y:1990:i:5:p:1039-53
    DOI: 10.1086/261718
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    Cited by:

    1. 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.
    2. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    3. Bingbing Dong, 2014. "Asset Pricing and Monetary Policy," 2014 Meeting Papers 881, Society for Economic Dynamics.
    4. Christian Aubin & IBRAHIMA DIOUF & DOMINIQUE PEPIN, 2013. "Influence De La Politique Monetaire Sur Le Prix Des Actifs Financiers :Les Enseignements D’Un Modele Miu Applique A La Fed: Impact Of Monetary Policy On Asset Prices :Lessons From A Miu Model Applied ," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 56(3-4), pages 313-333.
    5. Bruce Morley, 2007. "The monetary model of the exchange rate and equities: an ARDL bounds testing approach," Applied Financial Economics, Taylor & Francis Journals, vol. 17(5), pages 391-397.
    6. 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.
    7. Mishra, Ajay Kumar & Parikh, Bhavik & Spahr, Ronald W., 2020. "Stock market liquidity, funding liquidity, financial crises and quantitative easing," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 456-478.
    8. William A. Barnett & Haiyang Xu, 1998. "Money Velocity with Interest Rate Stochastic Volatility and Exact Aggregation," Macroeconomics 9803004, University Library of Munich, Germany.
    9. Lebre DE Freitas, Miguel, 2022. "International currency substitution and the demand for money in the euro area," Economic Modelling, Elsevier, vol. 117(C).
    10. William A. Barnett & Yi Liu & Haiyang Xu & Mark Jensen, 1996. "The CAPM Risk Adjustment Needed for Exact Aggregation over Financial Assets," Econometrics 9602003, University Library of Munich, Germany.
    11. 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.
    12. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
    13. Rakesh K. Bissoondeeal & Barry E. Jones & Jane M. Binner & Andrew W. Mullineux, 2010. "Household‐Sector Money Demand For The Uk," Manchester School, University of Manchester, vol. 78(s1), pages 90-113, September.
    14. Azad, Nahiyan Faisal & Serletis, Apostolos, 2022. "A century and a half of the monetary base-stock market relationship," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 118-124.
    15. Sergio Salas, 2020. "Precautionary Money Demand in a Cash-in-Advance Model," Working Papers 2020-03, Escuela de Negocios y Economía, Pontificia Universidad Católica de Valparaíso.
    16. Simon J. Broome & Morley, B., 2003. "Stock Prices and the Monetary Model of Exchange Rate: An Empirical Investigation," Economics Department Working Paper Series n1321103.pdf, Department of Economics, National University of Ireland - Maynooth.
    17. Litsios, Ioannis, 2013. "Exchange rate determination and equity prices: Evidence from the UK," The Journal of Economic Asymmetries, Elsevier, vol. 10(2), pages 115-128.
    18. 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.
    19. Guerello, Chiara, 2016. "The effect of investors’ confidence on monetary policy transmission mechanism," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 248-266.

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