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The real bills doctrine vs. the quantity theory: a reconsideration


  • Thomas J. Sargent
  • Neil Wallace


On our interpretation, real bills advocates favor unfettered intermediation, while their critics, who we call quantity theorists, favor legal restrictions on intermediation geared to separate “money” from “credit.” We display examples of economies in which quantity-theory assertions about “money-supply” and price-level behavior under the real bills regime are valid. In particular, both the price level and an asset total that quantity theorists would identify as money fluctuate more under a real bills regime than under a regime with restrictions like those favored by quantity theorists. Despite this, the Pareto criterion does not support the quantity-theory position.

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  • Thomas J. Sargent & Neil Wallace, 1981. "The real bills doctrine vs. the quantity theory: a reconsideration," Staff Report 64, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:64

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    References listed on IDEAS

    1. 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.
    2. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
    3. James Tobin, 1963. "Commercial Banks as Creators of 'Money'," Cowles Foundation Discussion Papers 159, Cowles Foundation for Research in Economics, Yale University.
    4. John Bryant & Neil Wallace, 1980. "A suggestion for further simplifying the theory of money," Staff Report 62, Federal Reserve Bank of Minneapolis.
    5. Kareken, John & Wallace, Neil, 1977. "Portfolio autarky: A welfare analysis," Journal of International Economics, Elsevier, vol. 7(1), pages 19-43, February.
    6. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
    7. Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
    8. Bryant, John & Wallace, Neil, 1979. "The Inefficiency of Interest-bearing National Debt," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 365-381, April.
    9. Martins, Marco Antonia Campos, 1980. "A Nominal Theory of the Nominal Rate of Interest and the Price Level," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 174-185, February.
    10. Walter Perrin Heller & Ross M. Starr, 1976. "Equilibrium with Non-convex Transactions Costs: Monetary and Non-monetary Economies," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 195-215.
    11. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
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    Cited by:

    1. Sargent, Thomas J. & Wallace, Meil, 1983. "A model of commodity money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 163-187.
    2. Marco A. Espinosa-Vega & Steven Russell, 1998. "A public finance analysis of multiple reserve requirements," FRB Atlanta Working Paper 98-1, Federal Reserve Bank of Atlanta.
    3. Guillermo Ortiz, 1983. "Dollarization in Mexico: Causes and Consequences," NBER Chapters,in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 71-106 National Bureau of Economic Research, Inc.
    4. Finn E. Kydland & Scott Freeman, 2000. "Monetary Aggregates and Output," American Economic Review, American Economic Association, vol. 90(5), pages 1125-1135, December.
    5. Sanford J. Grossman & Laurence Weiss, 1982. "A Transactions Based Model of the Monetary Transmission Mechanism: Part 1," NBER Working Papers 0973, National Bureau of Economic Research, Inc.
    6. Sargent, Thomas J, 1982. "Beyond Demand and Supply Curves in Macroeconomics," American Economic Review, American Economic Association, vol. 72(2), pages 382-389, May.
    7. Eaton, Jonathan, 1986. "Lending with costly enforcement of repayment and potential fraud," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 281-293, June.
    8. David Folkerts-Landau & Peter M. Garber, 1992. "The European Central Bank: A Bank or a Monetary Policy Rule," NBER Working Papers 4016, National Bureau of Economic Research, Inc.
    9. Stanley Fischer, 1982. "A Framework for Monetary and Banking Analysis," NBER Working Papers 0936, National Bureau of Economic Research, Inc.

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