Money supply and assets value

Abstract

The aim of this paper is to clarify the role of money supply as the most important target of the classical monetary policy for the price stability, inflation and economic growth. The theory of monetary policy was developed by observing the money supply. The simple relationship of the monetary policy including all instruments, targets and goals contains a huge number of empirical models which express relationship between money supply and demand, interest rates and asset prices. Accepting all determinations about regulation of money supply including the theory of quantity of money, money supply is described as supplementary function of inflation, interest rate, wealth, human capital, etc. The problem is to determine how the arguments will have influence on the money supply growth, which argument will initiate higher inflation, when and how long monetary policy instruments should be used. Using empirical models we examined relationship between money supply and assets value. Differentiation of the bond and money market was provided by the author using partial derivatives for estimating interaction between interest rates, prices, money supply, and assets value.