Expected Equity Returns and the Demand for Money

A BEJM Topics article. Abstract 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. Submitted: April 23, 2007 · Accepted: May 10, 2008 · Published: June 17, 2008 Recommended Citation Stern, Liliana V. and Stern, Michael L. (2008) "Expected Equity Returns and the Demand for Money," The B.E. Journal of Macroeconomics: Vol. 8 : Iss. 1 (Topics), Article 18. DOI: 10.2202/1935-1690.1592 Available at: http://www.bepress.com/bejm/vol8/iss1/art18