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 1980s.
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