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Informedness of Economic Agents and the Quantity Theory of Money

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  • Stanley C W Salvary

Abstract

Historically, informedness of economic agents via price stability has been a rationale for the money supply rule derived from the Quantity Theory of Money. The monetarists maintain that changes in the price level are attributable to the level of the money supply; hence, a money supply rule is adopted as the means to curb inflation. Given the adopted monetary policy, agents are informed of expected price level changes. From a relativist perspective, in the absence of monetary dislocation or revaluation, this paper maintains that changes in the general price level are attributable to the net effect of the realignment of relative prices. If as posited that changes in the general level of prices are not a function of changes in the supply of money but of changes in the composition of aggregate demand and supply, the money supply rule for monetary policy would be ineffective at best and disruptive at worst. Apart from adverse financial impacts on business, the ‘quantity theory’ inflation-designed short-term interest rate policy has induced several significant negative effects on the capital markets in 1987 and 2006. Apparently, economic agents are better informed under the ‘relativist’ approach than under the ‘monetarist’ approach.

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Bibliographic Info

Article provided by IUP Publications in its journal The IUP Journal of Monetary Economics.

Volume (Year): VI (2008)
Issue (Month): 1 (February)
Pages: 61-85

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Handle: RePEc:icf:icfjmo:v:06:y:2008:i:1:p:61-85

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