Wicksell's Monetary Framework and Dynamic Stability

31 Pages Posted: 3 Nov 2012

See all articles by Robert F. Graboyes

Robert F. Graboyes

Mercatus Center at George Mason University

Thomas M. Humphrey

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: September 1, 1990

Abstract

Traditionally, central banks seeking to stabilize general prices have followed policies similar to those advocated by Knut Wicksell: when prices are higher that desired, raise interest rates to exert downward pressure on prices, and conversely. Despite the historical predominance of interest rate-based monetary policies, analysts frequently focus on how prices are affected by control of the money stock (or its high-powered base). In those cases where they do examine the relationship between interest rates and prices, they mostly do so in a Keynesian framework rather than a Wicksellian one. For several reasons, Wicksell's analysis deserves renewed attention. Here, we examine whether his interest rate-adjustment rule, coupled with his famous cumulative process mechanism of price level change, can stabilize prices (and interest rates). We find that if the interest rate rule is properly specified, it can.

Suggested Citation

Graboyes, Robert F. and Humphrey, Thomas M., Wicksell's Monetary Framework and Dynamic Stability (September 1, 1990). Federal Reserve Bank of Richmond Working Paper No. 90-7. Available at SSRN: https://ssrn.com/abstract=2123587 or http://dx.doi.org/10.2139/ssrn.2123587

Robert F. Graboyes

Mercatus Center at George Mason University ( email )

3434 Washington Blvd. 4th Floor
Arlington, VA 22201
United States

Thomas M. Humphrey (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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