This paper introduces the principles supporting the fisher transaction equation. Then, it transforms the traditional quantity equation, and adds the financial economic department into the equation to estimate currency liquidity respectively. We show that when liquidity enters into the real economy and the financial economy, the capital price will change earlier than the product price does. We could also interpret that the excess liquidity in the financial economy firstly affects the capital price. Then, the capital price will take positive effects on the product price. This is opposed to the influence mechanism taken by liquidity on the real economy. We conclude by analyzing the relationship between liquidity in real economy, financial economy, and inflation.

Recommended Citation

Sun, Z. (2012). The relationship among the liquidity in real economy, financial economy and inflation. Lingnan Journal of Banking, Finance and Economics, 3. Retrieved from http://commons.ln.edu.hk/ljbfe/vol3/iss1/5