Lauvsnes, S: Determinants of a shifting effective demand equ

Building on Keynes‘ General Theory, this thesis holds that economic instability is due to a latent inverse relationship between expectations and risk assessment. It is assumed that stock markets have a significant influence on this relationship, thus affecting supply and demand in general. Demand for money as a store of wealth along with credit supply and demand are particularly important variables in the economic instability process. Moreover, the existence of such a mechanism implies co-trending (i.e. equilibrium) relationships between several macroeconomic variables. Some essential relationships have been tested empirically in various model specifications on Norwegian and US data. The cointegration models indicate bidirectional negative causation between stock prices and unemployment, and positive bidirectional causation between stock prices and consumption. It has also been shown that stock prices affect aggregate credit growth positively. Finally, money neutrality, a central tenet of contemporary orthodox economic theory, is rejected.