Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25156
Year of Publication: 
2006
Series/Report no.: 
SFB 649 Discussion Paper No. 2006,073
Publisher: 
Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk, Berlin
Abstract: 
This paper examines whether the existence and the timing of real balance effects contribute to the determination of the absolute price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. I show that there exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money yields transaction services. Predetermined real money balances can then serve as a state variable, implying that interest rate setting must be passive - a violation of the Taylor-principle - for unique, stable, and non-oscillatory equilibrium sequences. On the contrary, when the end-of-period money stock facilitates transactions, the equilibrium displays nominal indeterminancy and equilibrium uniqueness requires an interest rate setting consistent with the Taylor-principle.
Subjects: 
Real balance effects
predetermined money
price level determination
real determinacy
monetary policy rules
flexible prices
JEL: 
E32
E41
E52
Document Type: 
Working Paper

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