The real balance effect: Shortcomings

Sebastian Dullien

Chapter 3 in The Interaction of Monetary Policy and Wage Bargaining in the European Monetary Union, 2004, pp 48-75 from Palgrave Macmillan

Abstract: Abstract Why does wage restraint not increase domestic demand, as proclaimed in the SICCD models? In this chapter, I will argue that the real balance effect which is at the heart of the above models may not work as assumed. Falling prices do not necessarily and automatically increase aggregate domestic demand, as the real balance effect proclaims. It is not a coincidence that the real balance effect does not work: I will show that, for institutional and theoretical reasons, it cannot play a significant role in a world of modern central banking as we know it from the euro-zone, post-war Germany or the USA.

Keywords: Monetary Policy; Central Bank; Money Supply; Government Debt; Monetary Aggregate (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-00614-0_3

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DOI: 10.1057/9780230006140_3

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