19 May Stanley Fischer: (Money), interest and prices – Patinkin and Woodford. Speech by Mr Stanley Fischer, Vice Chair of the Board of Governors of. procedure which Professor Patinkin has proposed for the examination of the relative prices and interest as the quantity of money approaches zero as a limit. Download Citation on ResearchGate | Money, Interest and Prices | Twenty five to monetary and macroeconomics made in Don Patinkin’s Money, Interest, and.
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In other words, equilibrium will be restored, when other things being equal, the price level has risen in proportion to the increase in the money supply.
Patinkin’s Monetary Model – Explained !
What one needs the real balance effect for is to ensure the stability of the price level; one does not need it to determine the real equilibrium of the system; so long as one confines oneself to equilibrium positions. If there is a change in the amount of outside money alone without a change in the amount of inside money, there must be a change in the ratios of the debt that backs the inside money to the outside money, so that moneu change in the quantity of money involves a change in the real variables of the economic system, as a whole.
The equilibrium obtained is no intreest a short-term equilibrium only because further changes will be induced for income recipients in future time periods. In other words it considers the behavioural effects of changes in the real stock of money.
Now, when the prices rise in the same proportion as the amount of money, the real value of cash balances is exactly the same as it was in the beginning or in the pstinkin period t pricea the rate of interest remains unchanged. The whole process is bound to generate equilibrating forces prixes will lower the values of various variables to their equilibrium positions.
Don’t already have an Oxford Academic account? Gurley and Shaw severely criticized this feature of neutrality of money, for establishing which Patinkin had taken so much pain.
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Thus, when the amount of money in circulation pafinkin M 0the equilibrium of the economy was attained by p 0w 0 and r 0. House and Land Prices in French Cities. But prices, on the mondy hand, have also changed by now. Patinkin has been able to show the validity and the rehabilitation of the classical quantity theory of money through Keynesian tools with the help of and on the basis of certain basic assumptions: Close mobile search navigation Article navigation.
An increase in the stock of money was assumed to generate an increase in the absolute price level but to exercise no real influence upon the market for commodities. Since, there exists full employment, therefore, the supply function of finished goods can be written as:. They show that money cannot be neutral in a system containing inside and patinkinn money. First, the demand for money is a function of the level of wealth.
This will initiate a process of inflation. It differs from others in that it views the demand for money primarily as a function of income. Thus, Patinkin has discussed the validity of the quantity theory only under conditions of full employment, as according to him Keynes questioned its validity even under conditions of full employment.
This represents the inflationary gap. Net wealth effect is the first and important aspect of the real balance effect. Money will be non-neutral, as already seen, if there is a combination of inside-outside varieties of money. These authors primarily associate the term real balance effect with the net patinkih aspect, to the exclusion of all others. While this would eliminate the dichotomy, it would preserve the basic features of the classical monetary theory and particularly the invariance of the real equilibrium of the economy relative prices and the rate of interest with respect to changes in the quantity of money.
Shaw have also criticised the static assumptions of Patinkin and have enumerated and elucidated the conditions to show under which money will not be neutral.
Equilibrium in the market can be established only at a rate of interest lower than r 0for only by such reduction could individuals be induced to hold additional money available.
Don Patinkin agrees in his approach to the problem that the Keynesian analysis and economic variables provide more dependable interrelationships than does the velocity of circulation. Don Patinkin has shown that irrespective of the values of the marginal propensities to consume and invest and the existence of a non-zero propensity to hoard; an increase in the quantity of money must ultimately bring about a proportional increase in prices leaving the interest rate unaffected once the real balance effects are brought into the picture.
The use of the term in the wider sense as enunciated above also helps us to resolve the paradox—that income is the main determinant of expenditure on the micro level and wealth is a significant determinant of income on the macro level.
For the first time, the nature of the wealth effect is made explicit. A distinguishing feature of the portfolio aspect is that people increase or decrease their expenditures in order to restore their stock of money to the optimum level with respect to their asset portfolio.
Johnson also endorses these views expressed by Gurley and Shaw on the non-neutrality of money. In there appeared a monumental work by Don Patinkin which, inter alia, demonstrated the rigid conditions required for the strict proportionality rule of the quantity theory whilst simultaneously launching a severe attack upon the Cambridge analysis.
Similarly, flexibility of wages and prices is an important condition of the neutrality of money.
It is also assumed that there is no money illusion. Patinkin used the term real balance effect to include all the aspects of real balances in the first edition of his book. In other words, Patinkin has rehabilitated the truth contained in the old quantity theory of money with modern Keynesian tools.
Gurley and Shaw distinguished between outside money and inside money to show that the money pricds not be neutral.
Their failure was revealed in the dichotomy which they maintained between the goods market and the money market. A doubling of money balances is simply assumed and the analysis rests entirely on the resultant effects. Patinkin assumes full employment and deals with the above-mentioned criticism of Keynes that even under rigid ane the quantity theory is not valid unless certain other conditions are also fulfilled. According to Patinkin, these other conditions mentioned by Keynes besides, full employment are that the propensity to hoard [that part of the demand for money which depends upon the rate of interest—M 2 r ] should always be zero in equilibrium and that the effective demand AD should increase in the same proportion as the quantity of money—this will depend on the shapes of LP, MEC, CF functions.
This, in turn, reacts back on the money market through the multiplicative p in the demand for money equation. The person will have a larger stock of money than previously, in real terms, ptinkin not in nominal units. According to Cambridge aspect, an increase in the stock of real balances increases real balances relative to income.