Monetary policy and the flexibility of goods and services prices and asset prices

Quantitative easing monetary policies lead to parallel increases in the central bank money supply and in the money supply for non-bank economic agents (M2). At equilibrium, the money supply must be equal to demand for money, which can be broken down between demand for transaction money and demand for investment money. In the medium term, demand for transaction money is proportional to nominal GDP. As real GDP is determined by demographics and technological progress, an increase in demand for transaction money requires an increase in goods and services prices in the medium term. In the medium term, demand for investment money is proportional to the value of wealth. As the number of financial or real estate assets is very stable, an increase in demand for investment money requires an increase in asset prices (bonds equities, real estate) in the medium term. It seems that asset prices are much more flexible than goods and services prices: this explains why the increase in the money supply has been offset primarily by an increase in demand for investment money and has therefore led to a rise in asset prices and not goods and services prices .