# The Fundamental Equation of Monetary Dynamics

# The Fundamental Equation of Monetary Dynamics

This chapter examines Maurice Allais's fundamental equation of monetary dynamics (FEMD), which introduces the gap between desired and effective money balances in the differential expression of Newcomb-Fisher's equation of exchanges and shows this gap to be the factor explaining the variability of money velocity. The quantity theory of money is a relationship between four macroeconomic variables: the volume level of transactions, the price level of transactions, the quantity of money held by economic agents, and the transactions velocity of money. In its most general formulation, the FEMD identifies an additional source of finance: the rate of growth in nonbank credit during the period multiplied by the ratio of nonbank credit to bank credit at the beginning of the period. The FEMD demonstrates that the response period is variable over time. The HRL model of endogenous cyclical fluctuations brings together the FEMD and the HRL formulation of both the demand for and supply of money.

*Keywords:*
fundamental equation of monetary dynamics, Maurice Allais, money velocity, quantity theory of money, transactions, nonbank credit, bank credit, cyclical fluctuations, Newcomb-Fisher's equation of exchanges, monetary dynamics

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