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Monetary equilibrium and price stickiness: Causes, consequences and remedies

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  • Philipp Bagus

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  • David Howden

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Abstract

We reassess monetary equilibrium theory by focusing on its foundation – price stickiness – and answer several ancillary questions. Prices are sticky at times. Contra monetary equilibrium theorists, this is not a reason to advocate an issuance of fiduciary media to counteract the effects of a sluggish price adjustment process. Issuances of fiduciary media will breed negative effects, primarily via wealth redistributions, faulty interest rate signals and exacerbated business cycles. Allowing the price level to adjust to maintain monetary equilibrium provides for fewer detrimental effects than adjusting the supply of credit.
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Suggested Citation

  • Philipp Bagus & David Howden, 2011. "Monetary equilibrium and price stickiness: Causes, consequences and remedies," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 24(4), pages 383-402, December.
  • Handle: RePEc:kap:revaec:v:24:y:2011:i:4:p:383-402
    DOI: 10.1007/s11138-011-0151-7
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    References listed on IDEAS

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    4. Horwitz, Steven, 1996. "Capital Theory, Inflation and Deflation: The Austrians and Monetary Disequilibrium Theory Compared," Journal of the History of Economic Thought, Cambridge University Press, vol. 18(02), pages 287-308, September.
    5. Selgin, George, 1994. "Free Banking and Monetary Control," Economic Journal, Royal Economic Society, vol. 104(427), pages 1449-1459, November.
    6. Lawrence H. White, 2008. "Did Hayek and Robbins Deepen the Great Depression?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 751-768, June.
    7. Ball, Laurence & Mankiw, N. Gregory, 1994. "A sticky-price manifesto," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 127-151, December.
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    10. Solow, Robert M., 1979. "Another possible source of wage stickiness," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 79-82.
    11. Philipp Bagus, 2008. "Monetary policy as bad medicine: The volatile relationship between business cycles and asset prices," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 21(4), pages 283-300, December.
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    Citations

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    Cited by:

    1. Howden, David, 2013. "The Quantity Theory of Money," MPRA Paper 79601, University Library of Munich, Germany.
    2. Philipp Bagus & David Howden, 2012. "Monetary equilibrium and price stickiness: A rejoinder," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 271-277, September.
    3. Philipp Bagus & Amadeus Gabriel & David Howden, 2018. "On the Necessary and Sufficient Conditions for Legitimate Banking Contracts," Journal of Business Ethics, Springer, vol. 147(3), pages 669-678, February.
    4. David Howden, 2013. "Separating the Wheat from the Chaff: Icelandic and Irish Policy Responses to the Banking Crisis," Economic Affairs, Wiley Blackwell, vol. 33(3), pages 348-360, October.
    5. Van Den Hauwe, Ludwig, 2017. "Monetary Constitutionalism: Some Recent Developments," MPRA Paper 83052, University Library of Munich, Germany.
    6. Campos Dias de Sousa, Ricardo Emanuel & Howden, David, 2015. "The Efficient Market Conjecture," MPRA Paper 79792, University Library of Munich, Germany.
    7. William Luther & Alexander Salter, 2012. "Monetary equilibrium and price stickiness reconsidered: A reply to Bagus and Howden," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 263-269, September.

    More about this item

    Keywords

    Rigidities; Sticky prices; Monetary equilibrium theory; Free banking; 100% Reserve banking; E52; E58;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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