Document Type

Thesis - Open Access

Award Date

1973

Degree Name

Master of Science (MS)

Department

Economics

Abstract

Prior to 1945, few academic articles had been addressed to the area of equity valuation models. Since that time, with the advances of analytic economics and in particular the theory of interest rates, several formal equity valuation models have been developed. Several of the models myopically concentrated on microeconomic variables resulting in their inability to discern cyclical shifts in aggregate equity value indices. This shortcoming has been rectified by economists who have tended toward the reemerging monetarist school of thought. The result has been the construction of models designed to examine the movement of aggregate equity share price indices with regard to aggregate macroeconomic variables. A basic distinguishing characteristic of the monetarist school of thought is its emphasis on the effects of changes in the nominal money supply on the aggregate level of economic activity. A key variable through which these changes transmit their effects is the interest rate. The early monetarists viewed interest rates as the equilibrating mechanism between the demand for capital goods and the supply of loanable funds. From the times when Bohm-Bawerk and Wicksell wrote, the interest

rate has been used, by those using the loanable funds theory, as the equilibrating mechanism between the money supply and the cost of debt. With the advent of the writings of Milton Friedman, economists began to seriously consider alternative forms of wealth as being affected by changes in the money supply and interest rate. Among the alternative forms, and the one with which this paper will deal, was equities. It is the intent of this research effort to link relevant macroeconomic aggregates to an equity share price index through a model based on monetarist thinking and specifically a loanable funds type theory of interest rates. Of primary importance will be the demonstration of the money supply's effect upon an aggregate equity share index.

Library of Congress Subject Headings

Equity

Money supply

Interest rates

South Dakota State University Theses

Format

application/pdf

Number of Pages

59

Publisher

South Dakota State University

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