Financial Asset Valuations: The Total Demand Approach

This article provides an explanation of how monetary policy impacts the prices of financial assets relative to the prices of non-financial assets. In the standard view, monetary policy has no such effect. It may influence financial-asset prices in various ways, but it does not all by itself entail any tendency for financial-asset prices to rise faster than the prices of non-financial assets. We argue that the neglected “total demand approach” sheds a different light on this issue. Total-demand theory shows that monetary policy may have such a consequence. It also brings the additional advantage of simplifying the theory of monetary policy, in that it allows to conceptualise unconventional monetary policy and changes in the quality of money within a single theoretical framework.