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Monetary equilibrium

Author

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  • Joshua R. Hendrickson

    (University of Mississippi)

Abstract

One implication of the concept of monetary equilibrium is that the money supply should vary with money demand. In a recent paper, Bagus and Howden (Rev Austrian Econ 24:383–402, 2011) argue that this conclusion is predicated on the assumption of price stickiness. The purpose of this paper is to suggest that the foundation of monetary equilibrium is the role of money as a medium of exchange. As such, changes in the demand for money result in changes in both nominal and real spending that are welfare-reducing. This proposition is then used to examine whether a monetary policy in which the central bank varies the money supply in response to money demand can be considered optimal. In addition, the paper considers how a free banking system with competitive note issuance would vary the money supply in response to changes in money demand. In both cases, the results are consistent with the concept of monetary equilibrium. In addition, these results can be obtained even when prices are perfectly flexible if trade is decentralized (i.e. not conducted in Walrasian markets). Price stickiness is therefore not a necessary condition to suggest that the money supply should vary with money demand.

Suggested Citation

  • Joshua R. Hendrickson, 2015. "Monetary equilibrium," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 28(1), pages 53-73, March.
    • Handle: RePEc:kap:revaec:v:28:y:2015:i:1:d:10.1007_s11138-012-0190-8
    DOI: 10.1007/s11138-012-0190-8
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    References listed on IDEAS

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    1. Philipp Bagus & David Howden, 2012. "Monetary equilibrium and price stickiness: A rejoinder," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 271-277, September.
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    6. Philipp Bagus & David Howden, 2011. "Monetary equilibrium and price stickiness: Causes, consequences and remedies," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 24(4), pages 383-402, December.
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    Cited by:

    1. Hendrickson, Joshua R., 2022. "Commodity money, free banking, and nominal income targeting: Lessons for monetary policy reform," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 462-477.
    2. Alexander William Salter & Andrew T. Young, 2015. "Would a Free Banking System Target NGDP Growth?," Working Papers 15-08, Department of Economics, West Virginia University.
    3. Bryan P. Cutsinger, 2021. "Forced savings and political malinvestment: an application of steve horwitz’s microfoundations and macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 311-322, June.

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    More about this item

    Keywords

    Free banking; Nominal income targeting; Monetary equilibrium;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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