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Money Demand and Macroeconomic Stability Revisited

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  • Andreas Schabert
  • Christian Stoltenberg

Abstract

This paper examines how money demand induced real balance effects contribute to the determination of the price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. There exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money enters the utility function. Real money can then serve as a state variable, implying that interest rate setting must be passive for unique, stable, and non-oscillatory equilibrium sequences. When end-ofperiod money provides utility, an equilibrium is consistent with infinitely many price level sequences, and equilibrium uniqueness requires an active interest rate setting. The stability results are, in general, independent of the magnitude of real balance effects, and apply also when prices are sticky. In contrast, under a constant money growth policy, equilibrium sequences are (likely to be) locally stable and unique for all model variants.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-027.pdf
File Function: Revised version, 2005
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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-027.

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Length: 41 pages
Date of creation: May 2005
Date of revision: Aug 2005
Handle: RePEc:hum:wpaper:sfb649dp2005-027

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Keywords: Real balance effects; predetermined money; price level determination; real determinacy; monetary policy rules;

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Citations

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Cited by:
  1. Christian A. Stoltenberg, 2012. "Real Balance Effects, Timing, and Equilibrium Determination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 981-994, 08.
  2. Bruckner, Matthias & Schabert, Andreas, 2006. "Can money matter for interest rate policy?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2823-2857, December.
  3. Stephen McKnight & Alexander Mihailov, 2012. "Do real balance effects invalidate the Taylor principle in closed and open economies?," Serie documentos de trabajo del Centro de Estudios Económicos 2012-10, El Colegio de México, Centro de Estudios Económicos.

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