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Competitive Price Adjustment to Changes in the Money Supply

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  • Benjamin Eden

    (UCLA)

Abstract

In a competitive environment in which (ex ante) identical sellers set prices, the market price cannot always be based on updated information, since otherwise there will be no incentive to gather information about changes in demand. This result is applied to the case in which changes in the money supply are the only source of uncertainty. It is shown that, if the possible changes in the money supply are not large, the economy will exhibit a positive relationship between money and output but no involuntary unemployment. If the possible changes in the money supply are large, the economy will exhibit a positive relationship between money and employment, allowing for involuntary unemployment.
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Suggested Citation

  • Benjamin Eden, 1981. "Competitive Price Adjustment to Changes in the Money Supply," UCLA Economics Working Papers 199, UCLA Department of Economics.
  • Handle: RePEc:cla:uclawp:199
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    File URL: http://www.econ.ucla.edu/workingpapers/wp199.pdf
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    References listed on IDEAS

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    1. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-580, August.
    2. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
    5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    6. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    7. Axel Leijonhufvud, 1980. "Theories of Stagflation," UCLA Economics Working Papers 176, UCLA Department of Economics.
    8. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
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