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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Even otherwise, it has been pointed out that if some kind of monetary effect has got to be present, it need not necessarily be a real balance effect as the presence of real balance effect implies that people do not suffer from money illusion—they hold money for what it will buy. Most users should sign in with their email address. Email alerts New issue alert. Moreover, it is very interesting to point out that if the analysis is extended to an infinite number of periods, general long-run equilibrium is found to be perfectly consistent with pstinkin a unit elastic demand curve for money—the real balance effect disappears.

These writers have shown that if the money supply consists of a combination of inside and outside money, the classical neutrality prlces money does not hold good as claimed by Patinkin. A distinguishing feature of the portfolio aspect is that people increase or decrease their expenditures in pgices to restore their stock patinki money to the optimum level with respect to their asset portfolio.

The statement of equilibrium in the goods market is then that the goods demanded equal the goods supplied that is: In other words, with an increase in the quantity of money the price level no doubt rises continuously towards the new equilibrium level and the mnoey will be true of the wage rates. Ackley, Fellner, Mishan, Collery. It is typified by the bank deposits created by a patinkij banking system.

Money illusion constitutes a friction in the economic system and as such it makes it imperative for the monetary authority to create just the right amount of nominal balances if the neutrality of money is to be achieved.

Patinkin’s Monetary Model – Explained !

This, in turn, reacts back on the money market through the multiplicative p in the demand for money equation. Such a redistribution will mean a lowering in the rate of interest in case the quantity of money is doubled.


In other words, the same set of values—P 0w interfstand r 0simultaneously cause: The problem here is before Patinkin has been how these two theories can be reconciled—once this has been done, the other problem is— whether the reconciliation permits one to arrive at the classical proposition that an koney in the quantity of money will increase all prices in the same proportion, so that relative prices are not dependent on the quantity of money.

The mere fact that they want to hold money and that the available quantity is fixed will ensure the stability of price level—but it will not produce the neutrality of the money of the classical theory.

Patinkin’s Monetary Model – Explained !

Gurley and Shaw distinguished between outside money and inside money to show that the money will not be neutral. Thus, when the amount of money in circulation was M 0the equilibrium of the economy was attained by p 0w 0 and r 0. The real balance effect will now become operative and the LM function will shift to LM 1. Receive exclusive offers and updates from Oxford Academic.

In their attempt to remedy the situation, individuals spend their excess supply of money directly on the physical assets or indirectly in the financial market for securities etc.

But this is valid only in a pure barter economy, where there are no money holdings and as such the concept of absolute price level has no or little meaning. 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.

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Inside money snd the money created against private debt. For example, a price increase may reduce the demand for consumer goods and increase the demand for money and bonds bringing about a redistribution against high consuming groups and in favour of high saving and lending groups.

Household Sharing and Commitment: Citing articles via Web of Science 3. The basic disagreements centre on whether or not it is necessary to retain this real balance effect in the real analysis. Don’t already have an Oxford Academic account? The equilibrium position as described above prevails during a certain initial period t. According to Patinkin this contradiction could be removed and classical theory reconstituted by making the demand and supply functions depend on real cash balances as well as relative prices.


Shaw have also criticised intedest static assumptions of Patinkin and have enumerated and elucidated the conditions to show under which money will not be neutral. Johnson also endorses these views expressed by Gurley and Shaw on the non-neutrality of money.

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This article is also available for rental through DeepDyve. Thus, the real balance effect is the force behind the working of the quantity theory. Sign In or Create an Account. It differs from others in that it views the demand for money primarily as a function of income.

Further, with the help of real balance effect Patinkin shows that the quantity theory will hold good even in the extreme Keynesian case where the initial increase in the quantity of money directly affects only the demand for bonds M 2 and finally Patinkin has shown that a change in the quantity of money does not ultimately affect the rate of interest—even though a change in the rate of interest does affect the amount of money demanded.

A money supply consisting of a combination of inside and outside money implies that changes in the quantity of money will not simply produce a movement up or down in the general price level but will also produce changes in relative prices.

Similarly, if wages and prices rise in the same proportion then the real wage rate remains the same as it was in the initial period and, therefore, the labour market which was in equilibrium at the initial real wage rate w 0 must be in equilibrium now. Far from integrating the two, as had been claimed, Patinkin held that the neo-classical economists had kept the two rigidly apart.