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- Title
THE DEMAND FOR MONEY FUNCTION AND THE STABILITY OF MONETARY EQUILIBRIUM.
- Authors
Yarrow, G. K.
- Abstract
Assuming a constant rate of growth of the money supply, it has been shown that the stability properties of two simple macro-economic models are highly sensitive to the functional specification of the demand for money relationship. Perhaps the most notable result is the finding that, in the Keynesian model, a constant interest-elasticity of demand for real balances implies that equilibrium is unstable at sufficiently low rates of growth of the money supply. Thus, given the reasonably successful use of the constant elasticity function in a wide range of empirical work, instabilities may well be a common feature of macro-economic models incorporating price flexibility. It should be noted that this argument does not necessarily conflict with the results of studies of rapid inflations which, on the whole, tend to indicate stable equilibria (see Laidler and Parkin). As shown above, it is perfectly possible for the same model to have stable and unstable equilibria at "high" and "low" rates of monetary expansion respectively. Since most empirical studies of the demand for money have tended to concentrate on establishing the existence of significant relationships between the relevant variables, rather than on testing for the appropriate functional form, it is suggested that further empirical work directed toward the latter problem (together with further analysis of the formation of expectations) is required before conclusions about the stability of equilibrium for a given rate of monetary expansion can be reached with any degree of confidence.
- Subjects
MONEY supply; DEMAND for money; ECONOMIC equilibrium; KEYNESIAN economics; MACROECONOMICS
- Publication
Economic Journal, 1977, Vol 87, Issue 345, p114
- ISSN
0013-0133
- Publication type
Article
- DOI
10.2307/2231836