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The real balance effect: Shortcomings

In: The Interaction of Monetary Policy and Wage Bargaining in the European Monetary Union

Author

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  • Sebastian Dullien

    (Financial Times Deutschland)

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.

Suggested Citation

  • Sebastian Dullien, 2004. "The real balance effect: Shortcomings," Palgrave Macmillan Books, in: The Interaction of Monetary Policy and Wage Bargaining in the European Monetary Union, chapter 3, pages 48-75, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-00614-0_3
    DOI: 10.1057/9780230006140_3
    as

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