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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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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00518.x
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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. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
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  11. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Money Growth Rules and Price Level Determinacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 263-275, April.
  12. Jean-Pascal Benassy, 2000. "Price Level Determinacy under a Pure Interest Rate Peg," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 194-211, January.
  13. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
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