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Real Balance Effects, Timing, and Equilibrium Determination

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  • CHRISTIAN A. STOLTENBERG

Abstract

This paper examines whether the existence and the timing of real balance effects contribute to the determination of the absolute price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. I show that there exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money yields transaction services. Predetermined real money balances can then serve as a state variable, implying that interest rate setting must be passive - a violation of the Taylor-principle - for unique, stable, and non-oscillatory equilibrium sequences. On the contrary, when the end-of-period money stock facilitates transactions, the equilibrium displays nominal indeterminacy and equilibrium uniqueness requires an interest rate setting consistent with the Taylor-principle.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 5 (08)
Pages: 981-994

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:5:p:981-994

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Schabert, Andreas & Stoltenberg, Christian, 2005. "Money demand and macroeconomic stability revisited," Working Paper Series 0458, European Central Bank.
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