A REFINEMENT OF THE FISHER'S EQUATION
A REFINEMENT OF THE FISHER'S EQUATION

Summary/Abstract: Fisher's equation, or the equation of exchange, relates the money supply to the price levels, the monetary dynamics, and the economic activity. This equation, in its most cited form, shows imprecisions when it comes to the dimensional analysis of the quantities it relates. A need for clarifying the interpretation of these quantities and for facilitating the application of this equation has motivated this endeavour. In this work, first the Fisher's equation has been analysed dimensionally, and certain difficulties for its correct interpretation have been shown. Then, a basic exposition of the operation of an economic system has been given, together with an analysis of the dynamics of trade in a money based economy. It has been shown that for each participant in an economy there is a monetary holding function, which is composed of mathematically simple elementary monetary holding functions. These elementary monetary holding functions arise naturally from trading transactions. One important consequence of this analysis is the discovery that the essential function of the money in an economy is that of memory of contributions to the economy by the participants in trade. In the sequel, a new form of the equation relating the supply of money to the trade activity and level of prices has been derived. The derivation has been performed from the underlying mathematical principles, and with attention being paid to the dimensions of the involved quantities. With some well justified simplification, a refined form of the Fisher's equation has been produced. A facilitated application of the equation in its new form has been shown through a brief analysis of the phenomenon of monetary inflation, and the influence of the money supply on prices and overall economic activity.

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