Citation

Discussion Paper Details

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Title: Money Demand and Macroeconomic Stability Revisited

Author(s): Andreas Schabert and Christian Stoltenberg

Publication Date: March 2005

Keyword(s): monetary policy rules, predetermined money, price level determination, real balance effects and real determinacy

Programme Area(s): International Macroeconomics

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-of-period 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.

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Bibliographic Reference

Schabert, A and Stoltenberg, C. 2005. 'Money Demand and Macroeconomic Stability Revisited'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4974