Abstract
This paper aims to integrate the money market into the structure of the economy. The microfoundation is the starting point to define the money market and the general equilibrium mechanism of the economy. On this basis, this research seeks a linking mechanism of the money market with economic activity in the general equilibrium framework. The relationships between money supply and national outcome, inflation, and price level are studied in three cases: full-employment equilibrium economy, steady-state equilibrium economy, and sticky-price equilibrium economy. The research result explains the interrelation and transmission mechanism between the money market and the general equilibrium of the economy. The paper provides the theoretical foundation for further research on the money market and monetary policies towards economic growth and macroeconomic stability.
Highlights
Many monetary theories and models have been developed for monetary policy analysis in economic development, the underlying monetary theories are deficient with solid foundations in linking the money market with economic activities
The inIn the case of the steady-state equilibrium economy, the economic growth responds verted Fisher hypothesis may be concerned as the structure of the money market is extended with the market scale in which there are increases in the quantity (Q) and the price (p) at with the bond market and regulations on interest rates
The steady-state monetary model is relevant with the classical theory of general equilibrium and the new classical model with rational expectations hypothesis, in which the levels of price and quantity increase with the same growth rate as the nominal GDP
Summary
The Fisherian view relies on the classical quantity theory of money, in which monetarists argued that money is neutral in the long term and should be in the short term. Many monetary theories and models have been developed for monetary policy analysis in economic development, the underlying monetary theories are deficient with solid foundations in linking the money market with economic activities. For these reasons, this paper integrates the money market into the general equilibrium framework. The research develops microfoundations that are the key to explaining the market behaviors and general equilibrium mechanism.
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