Short-Run Adjustment in Models of Money and Growth

Douglas Purvis

No 55, Working Paper from Economics Department, Queen's University

Abstract: Keynes-Wicksell models are one of the approaches to monetary growth theory. The essential features of the KW models are independent investment savings decisions, and the explicit representation of a price equation in which prices rise only in response to excess demand in the goods market. Then, from Walras' law, corresponding to the excess demand in the goods market there must be excess flow supply in the money market. Jerome Stein then treats the special case where the flow excess supply of money corresponds to a stock excess supply of money, and hence prices move in response to stock disequilibrium in the asset markets. It is argued here that this possibility of stock disequilibrium is in fact the crucial point of departure from the neoclassical scenario, and by considering the implications of stock disequilibrium on the demand behavior of the economic agents, the KW and neoclassical approaches are more easily reconcilable. Specifically,adjustment costs are explicitly introduced to explain the stock disequilibrium, and wealth holders act to adjust their asset holdings in an optimum manner along an equilibrium path. That is, the flows dominate in the short run, and flow equilibrium is sustained. Long run equilibrium is characterized by stock equilibrium in addition to flow equilibrium. It is the purpose of this note to explicitly analyse the flow aspects of a simple model which reflects the essential details of that used by Stein and to derive simple dynamics of price change consistent with possible stock disequilibrium.

Pages: 14 pages
Date: 1971-07
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