Money Demand and Macroeconomic Stability Revisited

39 Pages Posted: 28 Jul 2005

See all articles by Andreas Schabert

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Christian A. Stoltenberg

University of Amsterdam

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

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.

Keywords: Real balance effects, predetermined money, price level determination, real determinacy, monetary policy rules

JEL Classification: E32, E41, E52

Suggested Citation

Schabert, Andreas and Stoltenberg, Christian A., Money Demand and Macroeconomic Stability Revisited (March 2005). CEPR Discussion Paper No. 4974. Available at SSRN: https://ssrn.com/abstract=771664

Andreas Schabert (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Christian A. Stoltenberg

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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