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- Title
Monetarist and Keynesian Models of the Transmission of Inflation.
- Authors
Branson, William H.
- Abstract
The author argues that the Keynesian model is more consistent with the facts, and that both the monetary and monetarist models are extensions of the Keynesian model with additional, unrealistically restrictive assumptions. In the monetarist theory of world inflation, the excess of the growth rate of the world money stock over the growth rate of output determines the world rate of inflation. By an extension of the law of one price, this determines each country's rate of inflation. The keys to all this are the condition that money demand equals supply, and the extreme small-country assumptions. There are two empirical implications in the monetarist model. One is that national inflation rates converge to the world rate. The second is that reserve changes offset one-for-one changes in the domestic credit base, with the money stock being completely endogenous. Thus it does appear that inflationary impulses emanating from shocks in the real demand sector in the U.S. are accompanied by U.S. deficits and surpluses in other countries, but only because of the relative immobility of capital in the U.S. balance of payments. One implication of the monetarist model is the convergence of national rates of inflation toward the world rate. One can obtain the same result from a Keynesian foreign trade multiplier model plus a price-Phillips curve, as well.
- Subjects
UNITED States; MATHEMATICAL models of economics; KEYNESIAN economics; MONETARY theory; PRICE inflation; BALANCE of payments; INTERNATIONAL finance; PHILLIPS curve
- Publication
American Economic Review, 1975, Vol 65, Issue 2, p115
- ISSN
0002-8282
- Publication type
Article