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Monetary equilibrium and price stickiness reconsidered: A reply to Bagus and Howden

Listed author(s):
  • William Luther

    ()

  • Alexander Salter

    ()

Bagus and Howden (Review of Austrian Economics 24(4): 383–402, 2011 ) argue that price stickiness is a poor justification for advocating a flexible money supply through the issuing of fiduciary media under central or free banking. They view the contraction in output following an exogenous increase in money demand as an optimal response, worry about redistribution effects from the issuance of fiduciary media, and claim a changing money supply complicates economic calculation. Accepting their view that the contraction in output is an optimal response to an exogenous change in money demand, we still find a potentially beneficial role for monetary policy (under central banking) or fractional reserve note issue (under free banking). We show that even if all prices were perfectly flexible, changes in the money supply to offset changes in money demand might still be desirable. We point out several errors and mischaracterizations in their article, justify our decision to disregard wealth transfers, and discuss how a flexible money supply might facilitate economic calculation. Copyright Springer Science+Business Media, LLC 2012

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File URL: http://hdl.handle.net/10.1007/s11138-012-0184-6
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Article provided by Springer & Society for the Development of Austrian Economics in its journal The Review of Austrian Economics.

Volume (Year): 25 (2012)
Issue (Month): 3 (September)
Pages: 263-269

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Handle: RePEc:kap:revaec:v:25:y:2012:i:3:p:263-269
DOI: 10.1007/s11138-012-0184-6
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  1. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
  2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
  3. George Selgin, 2012. "Mere quibbles: Bagus and Howden’s critique of the theory of free banking," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(2), pages 131-148, June.
  4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  5. 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.
  6. Bagus, Philipp & Howden, David, 2010. "Fractional Reserve Banking: Some Quibbles," MPRA Paper 79590, University Library of Munich, Germany.
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