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Transmission Mechanism,equilibrium and Multiplier

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  • Author One

    (Peking University)

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    Dear Sir or Madam: I am a scholar of macroeconomics, and now studying at the school of economics of Peking University in PRC. Although there is much to do to develop the education, academicians and students are active thinkers and raised many interesting questions. I followed some of the issue and proposed my own idea. As for the monetary transmission mechanism, many theories do not tell us the route from one static equilibrium point to another. Some academicians argue that the mechanism is like camera bellows, and we cannot and need not know the process. But we should at least prove that the economy is able to transmit from one point to another.. The cobweb model in microeconomics shows that although the equilibrium point is determined by the intersection of the supply curve and demand curve. However, after a shock to the supply, the economy will not always result in a convergent point, and even bounds larger and larger round the equilibrium. Statistics shows that although the economy sometimes fluctuates sharply around the equilibrium, it will generally become stable, and such cases as the out-of -equilibrium never exist for long. I think the problem partly lies in the assumption. The model implies that everyone must behave rigidly. In fact, individuals are unpredictable, and a mathematical model cannot simplify their behavioral. Moreover, some academicians made similar misleading deduction of the monetary transmission mechanism. Deduction 1 shows their theory. I personally think that although the multiplier theory is a wonderful tool to help us explain the change of economy, it also set our students` minds in a rigid way of thinking. I developed an alternative deduction, and designed a computer program, which may demonstrate the whole transmission process and strengthen my argument. I hope my argument can give our students a new idea, though it does not fully resolve the problem. During my study, I consulted several macroeconomists. Ben S. Bernanke, the Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, whom I contacted several times, gave me many valuable suggestions on the flaws of my article. Michael Parkin, professor of the University of Western Ontario, also gave me some terrific ideas. Professor N. Gregory Mankiw, University of Harvard, said that my article involved an issue of out-of-equilibrium IS-LM model, which was far from fully resolved in the economic field. I am really grateful to their help. I hope my article will be published soon so that we can discuss the unresolved issue openly, and call on the students of macroeconomics from all over the world to participate in the debate. Whether you publish it or nor, please notify me soon after a decision is made Address: building 38, Room 409, Peking University, Beijing, PRC.

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    Paper provided by EconWPA in its series Macroeconomics with number 0109003.

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    Date of creation: 16 Sep 2001
    Handle: RePEc:wpa:wuwpma:0109003
    Note: Type of Document - WordPerfect; prepared on IBM PC - PC-TEX/;
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