Do stock prices play a significant role in formulating monetary policy? A case study
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The theory of money demand has been explained using different models. Economic theory says that a basic money demand function depends on variables that reflect the level of transactions in the economy such as real income or real wealth, and opportunity cost variables such as the rate of interest or the rate of inflation. This setting does not take into account investment decision by investors, which are reflected in the stock price movements. The money demand function is one of the key models monetary policy makers’ use, as certain measures of money are reliably linked to objectives of policy. These may include intermediate targets such as long-run economic growth (represented by percentage change in real GDP) and steady inflation.
Money demand , Stock prices , Cointegration , Long run structural modelling
Mohammed Masih, Abul Mansur and De Mello, Lurion. (2009). Do stock prices play a significant role in formulating monetary policy? A case study. Economia Internazionale, 62 (2), pp. 203-232.
Institute of International Economics