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Real Balance Effects, Timing, and Equilibrium Determination
Author(s) -
STOLTENBERG CHRISTIAN A.
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00518.x
Subject(s) - determinacy , economics , monetary policy , inflation (cosmology) , nominal interest rate , interest rate , balance (ability) , taylor rule , monetary economics , real interest rate , econometrics , macroeconomics , keynesian economics , central bank , mathematics , medicine , mathematical analysis , physics , theoretical physics , physical medicine and rehabilitation
By assuming that money balances at the beginning instead of at the end of the period provide transaction services, standard results on nominal and real determinacy in monetary models are overturned. The key is that predetermined real money balances can be a state variable. Whereas the determination of the absolute price level typically depends on fiscal policy under an exogenous interest setting, nominal determinacy is now achieved even when fiscal policy is Ricardian. Also, in contrast to the Taylor principle, the interest rate policy should respond passively to changes in inflation, thus ensuring nonoscillatory and locally stable equilibrium sequences.