Monetary Policy and Asset Prices

Athanasios Geromichalos, Juan M Licari and José Suárez-Lledó
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Juan M Licari: University of Pennsylvania

Review of Economic Dynamics, 2007, vol. 10, issue 4, 761-779

Abstract: The purpose of this paper is study the effect of monetary policy on asset prices. We study the properties of a monetary model in which a real asset is valued for its rate of return and for its liquidity. We show that money is essential if and only if real assets are scarce, in the precise sense that their supply is not sufficient to satisfy the demand for liquidity. Our model generates a clear connection between asset prices and monetary policy. When money grows at a higher rate, inflation is higher and the return on money decreases. In equilibrium, no arbitrage amounts to equating the real return of both objects. Therefore, the price of the asset increases in order to lower its real return. This negative relationship between inflation and asset returns is in the spirit of research in finance initiated in the early 80's. (Copyright: Elsevier)

Keywords: Liquidity; Monetary policy; Inflation; Asset pricing; Asset returns (search for similar items in EconPapers)
JEL-codes: E31 E50 E52 E58 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (153)

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DOI: 10.1016/j.red.2007.03.002

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