IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/43531.html
   My bibliography  Save this paper

The Equation of Exchange: A Derivation

Author

Listed:
  • Hunte, C.K

Abstract

This paper provides a theoretically plausible model to explain the equation of exchange, deriving it from an agent's utility maximization problem and the profit maximization behavior of a competitive firm. It shows that the marginal propensity to consume is constant, while the average propensity to consume is decreasing as income increases. Supporting the notion that consumption growth is positively related to income growth, it confirms that the marginal propensity to consume has a theoretical basis for modifying velocity, money demand and consumption,given that money demand is inversely related to the interest rate and positively related to income.

Suggested Citation

  • Hunte, C.K, 2011. "The Equation of Exchange: A Derivation," MPRA Paper 43531, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:43531
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/43531/1/MPRA_paper_43531.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Husted, Steven & Rush, Mark, 1984. "On measuring the nearness of near moneys revisited," Journal of Monetary Economics, Elsevier, vol. 14(2), pages 171-181, September.
    2. James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," Working papers 408, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Siklos, Pierre L, 1993. "Income Velocity and Institutional Change: Some New Time Series Evidence, 1870-1986," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 377-392, August.
    4. Klein, Benjamin, 1973. "Income Velocity, Interest Rates, and the Money Supply Multiplier: A Reinterpretation of the Long-Term Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(2), pages 656-667, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. C. Kenrick Hunte, 2012. "The Equation of Exchange: A Derivation," The American Economist, Sage Publications, vol. 57(2), pages 210-215, November.
    2. James M. Poterba & Julio J. Rotemberg, 1986. "Money in the Utility Function: An Empirical Implementation," NBER Working Papers 1796, National Bureau of Economic Research, Inc.
    3. NAJAM us SAQIB & ALlY A H. KHAN, 1988. "On an Empirical Definition of Money for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(4), pages 853-859.
    4. William A. Barnett & Melvin J. Hinich & Piyu Yue, 2011. "The Exact Theoretical Rational Expectations Monetary Aggregate," World Scientific Book Chapters, in: Financial Aggregation And Index Number Theory, chapter 2, pages 53-84, World Scientific Publishing Co. Pte. Ltd..
    5. 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.
    6. Marco Airaudo & Luis-Felipe Zanna, 2004. "Endogenous Fluctuations in Open Economies: The Perils of Taylor Rules Revisited," Money Macro and Finance (MMF) Research Group Conference 2004 6, Money Macro and Finance Research Group.
    7. William A. Barnett, 2000. "Which Road Leads to Stable Money Demand?," Contributions to Economic Analysis, in: The Theory of Monetary Aggregation, pages 577-592, Emerald Group Publishing Limited.
    8. Lin William Cong & Ye Li & Neng Wang, 2021. "Tokenomics: Dynamic Adoption and Valuation [The demand of liquid assets with uncertain lumpy expenditures]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1105-1155.
    9. Habibullah, Muzafar, 1999. "Using P-Star Model to Linking Money and Prices in A Financial Liberalised Developing Economy: The Case for Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 33, pages 123-140.
    10. Gillman M. & Siklos & P.L.Silver & J.L., 1996. "Money Velocity with Costly Credit," Department of Economics - Working Papers Series 515, The University of Melbourne.
    11. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    12. Benchimol, Jonathan & Qureshi, Irfan, 2020. "Time-varying money demand and real balance effects," Economic Modelling, Elsevier, vol. 87(C), pages 197-211.
    13. Joseph Abadi & Markus Brunnermeier & Yann Koby, 2023. "The Reversal Interest Rate," American Economic Review, American Economic Association, vol. 113(8), pages 2084-2120, August.
    14. Martha Misas A. & Enrique López & Luis Fernando Melo, 1999. "La inflación desde una perspectiva monetaria: un modelo P* para Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, issue 35, pages 5-53, May.
    15. Arrau, Patricio & De Gregorio, Jose & Reinhart, Carmen M. & Wickham, Peter, 1995. "The demand for money in developing countries: Assessing the role of financial innovation," Journal of Development Economics, Elsevier, vol. 46(2), pages 317-340, April.
    16. Steven F. Venti & David A. Wise, 1987. "IRAs and Saving," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 7-52, National Bureau of Economic Research, Inc.
    17. Armando Rodríguez Zerpa, José U. Mora Mora, 2013. "La demanda de dinero y las innovaciones financieras en Venezuela: equilibrio de largo plazo," Revista CIFE, Universidad Santo Tomás, June.
    18. James, Gregory A., 2005. "Money demand and financial liberalization in Indonesia," Journal of Asian Economics, Elsevier, vol. 16(5), pages 817-829, October.
    19. Travis D. Nesmith, 2005. "Solving stochastic money-in-the-utility-function models," Finance and Economics Discussion Series 2005-52, Board of Governors of the Federal Reserve System (U.S.).
    20. Koenig, Evan F., 1996. "Long-term interest rates and the recent weakness in M2," Journal of Economics and Business, Elsevier, vol. 48(2), pages 81-101, May.

    More about this item

    Keywords

    Equation of Exchange; money demand; income velocity; marginal propensity to consume;
    All these keywords.

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:43531. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.