IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Rethinking equilibrium conditions in macromonetary theory: A conceptually rigorous approach

  • Piet-Hein Van Eeghen
Registered author(s):

    Although still very much a minority view, there is a growing sense of unease about the high degree of abstraction involved in contemporary macro-monetary theory, in particular concerning its representative-agent microfoundation (see e.g. Colander et al., 2008; Goodhart, 2005, 2008; Buiter, 2009; Caballero, 2010; Hoover, 2010; Du Plessis, 2010; Meeusen, 2010). The paper shares this unease but questions another aspect of contemporary theory: its equilibrium conditions as consisting of its market coordination conditions and budget equation. The paper derives, from scratch, an alternative set of such conditions which it rigorously grounds in the nature of monetary exchange. This alternative set has implications for a wide variety of issues, including the aptness of MIU and CIA modelling, the nature of real and monetary disturbances, and the linkage between the financial and real sectors. The paper also assesses the conceptual soundness of commonly used constructs like Keynes’s income-spending (saving-investment) equation of IS analysis, Hicks’s wealth constraint, Fisher’s quantity equation, Walras’s Law, and the budget constraint of contemporary DSGE modelling.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Economic Research Southern Africa in its series Working Papers with number 255.

    in new window

    Length: 27 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:rza:wpaper:255
    Contact details of provider: Postal:
    Newlands on Main, F0301 3rd Floor Mariendahl House, cnr Campground and Main Rds, Claremont, 7700 Cape Town

    Phone: 021 671-3980
    Fax: +27 21 671 3912
    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Goodfriend, Marvin & McCallum, Bennett T., 2007. "Banking and interest rates in monetary policy analysis: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1480-1507, July.
    2. Bossone, Biagio, 2001. "Do banks have a future?: A study on banking and finance as we move into the third millennium," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2239-2276, December.
    3. Laidler, David, 1984. "The 'Buffer Stock' Notion in Monetary Economics," Economic Journal, Royal Economic Society, vol. 94(376a), pages 17-34, Supplemen.
    4. Vasco Cúrdia & Michael Woodford, 2015. "Credit Frictions and Optimal Monetary Policy," NBER Working Papers 21820, National Bureau of Economic Research, Inc.
    5. Goodhart, Charles A. E., 1998. "The two concepts of money: implications for the analysis of optimal currency areas," European Journal of Political Economy, Elsevier, vol. 14(3), pages 407-432, August.
    6. Gilchrist, Simon, 2007. "Comment on: Banking and interest rates in monetary policy analysis: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1508-1514, July.
    7. Clower, Robert & Leijonhufvud, Axel, 1975. "The Coordination of Economic Activities: A Keynesian Perspective," American Economic Review, American Economic Association, vol. 65(2), pages 182-88, May.
    8. Stan du Plessis, 2010. "Implications of the financial crisis for models in monetary policy," Working Papers 18/2010, Stellenbosch University, Department of Economics.
    9. C. A. E. Goodhart, 2009. "The Continuing Muddles of Monetary Theory: A Steadfast Refusal to Face Facts," Economica, London School of Economics and Political Science, vol. 76(s1), pages 821-830, October.
    10. Adrian, Tobias & Song Shin, Hyun, 2010. "Financial Intermediaries and Monetary Economics," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 12, pages 601-650 Elsevier.
    11. Michael Woodford, 2010. "Financial Intermediation and Macroeconomic Analysis," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 21-44, Fall.
    12. Joseph M. Ostroy & Ross M. Starr, 1973. "Money and the Decentralization of Exchange," UCLA Economics Working Papers 041, UCLA Department of Economics.
    13. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
    14. Axel Leijonhufvud, 2009. "Limits to the equilibrating capabilities of market systems," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 4(2), pages 173-182, November.
    15. Bennett T. McCallum, 2004. "Monetary Policy In Economies With Little Or No Money," Pacific Economic Review, Wiley Blackwell, vol. 9(2), pages 81-92, 06.
    16. Laidler, David, 1997. "Notes on the Microfoundations of Monetary Economics," Economic Journal, Royal Economic Society, vol. 107(443), pages 1213-23, July.
    17. Dave Colander & Peter Howitt & Alan Kirman & Axel Leijonhufvud & Perry Mehrling, 2008. "Beyond DSGE Models: Toward an Empirically Based Macroeconomics," Middlebury College Working Paper Series 0808, Middlebury College, Department of Economics.
    18. Harrison, Glenn W., 1980. "The stock-flow distinction: A suggested interpretation," Journal of Macroeconomics, Elsevier, vol. 2(2), pages 111-128.
    19. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
    20. Muellbauer, John, 2008. "Housing, Credit and Consumer Expenditure," CEPR Discussion Papers 6782, C.E.P.R. Discussion Papers.
    21. Ricardo J. Caballero, 2010. "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 85-102, Fall.
    22. Peter Howitt, 2006. "The Microfoundations of the Keynesian Multiplier Process," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 1(1), pages 33-44, May.
    23. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
    24. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
    25. Lucas, Robert E, Jr, 1996. "Nobel Lecture: Monetary Neutrality," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 661-82, August.
    26. Sexton, Robert L. & Clower, Robert W. & Graves, Philip E. & Lee, Dwight R., 1992. "Incorporating inventories into supply and demand analysis," MPRA Paper 19905, University Library of Munich, Germany.
    27. Daniel L. Thornton, 2000. "Money in a theory of exchange," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 35-60.
    28. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
    29. Ostroy, Joseph M. & Starr, Ross M., 1990. "The transactions role of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 1, pages 3-62 Elsevier.
    30. Meir Kohn, 1988. "The Finance Constraint Theory of Money: A Progress Report," Economics Working Paper Archive wp_5, Levy Economics Institute.
    31. Leland Yeager & Alan Rabin, 1997. "Monetary aspects of Walras's law and the stock-flow problem," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(1), pages 18-36, March.
    32. Niehans, Jurg, 1987. "Classical Monetary Theory, New and Old," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 409-24, November.
    33. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:rza:wpaper:255. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Charles Tanton)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.