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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.

Suggested Citation

  • Andreas Schabert & Christian Stoltenberg, 2005. "Money Demand and Macroeconomic Stability Revisited," SFB 649 Discussion Papers SFB649DP2005-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Aug 2005.
  • Handle: RePEc:hum:wpaper:sfb649dp2005-027
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    Cited by:

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    3. Stephen McKnight & Alexander Mihailov, 2015. "Do Real Balance Effects Invalidate the Taylor Principle in Closed and Open Economies?," Economica, London School of Economics and Political Science, vol. 82(328), pages 938-975, October.
    4. 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, August.

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    More about this item

    Keywords

    Real balance effects; predetermined money; price level determination; real determinacy; monetary policy rules;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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