The response of aggregate demand to income, money supply, and price level

1984 ◽  
Vol 6 (3) ◽  
pp. 357-363 ◽  
Author(s):  
Yew-Kwang Ng
Keyword(s):  
Money Supply ◽  
Price Level ◽  
Aggregate Demand

scholarly journals Monetary Policy And Not Monetary Control: A Rethinking

2011 ◽  
Vol 14 (1) ◽  
pp. 91
Author(s):  
Stanley C. W. Salvary
Keyword(s):  
Monetary Policy ◽  
Money Supply ◽  
Price Level ◽  
Aggregate Demand ◽  
General Level ◽  
Empirical Reality ◽  
Strict Adherence ◽  
Relative Prices ◽  
Monetary Control

The view that prediction is the only important concern when policy is to be developed has led to the strict adherence to a money supply rule via the Quantity Theory of Money with its debilitating consequences. The monetarists place the emphasis on the level of the money supply in the determination of price level changes and monetary control is exercised. Along with this line of thinking, statistical elegance transcends empirical reality. Thus, the ensuing consequences of monetary control are not surprising. There are continuous increases in the general level of pries and increasing problems of unemployment, which fuel the flames of business downsizing. In this paper, an alternative to the monetarist explanation of the determination of the price level is advanced. The alternative explanation does not rely on changes in the supply of money but on changes in the composition of aggregate demand and supply. Absent monetary dislocation or revaluation of the currency, change in the general price level is attributed to the net effect of the realignment of relative prices. It is argued that a rethinking of the situation would results in monetary policy that is compatible with the economic setting and not monetary control which crowds out fiscal policy.

A note on nominal GNP targeting and the price level elasticity of aggregate demand

1993 ◽  
Vol 21 (1) ◽  
pp. 105-105
Author(s):  
Ben L. Kyer ◽  
Gary E. Maggs
Keyword(s):  
Price Level ◽  
Aggregate Demand

ALTERNATIVE MONETARY POLICIES IN A TURNPIKE ECONOMY

2010 ◽  
Vol 14 (5) ◽  
pp. 727-762 ◽  
Author(s):  
Rodolfo Manuelli ◽  
Thomas J. Sargent
Keyword(s):  
Money Supply ◽  
Optimal Policy ◽  
Optimal Allocation ◽  
Price Level ◽  
Optimal Rate ◽  
Pareto Optimal ◽  
Monetary Policies

This paper modifies a Townsend turnpike model by letting agents stay at a location long enough to trade some consumption loans, but not long enough to support a Pareto-optimal allocation. Monetary equilibria exist that are nonoptimal in the absence of a scheme to pay interest on currency at a particular rate. Paying interest on currency at the optimal rate delivers a Pareto-optimal allocation, but a different one than the allocation for an associated nonmonetary centralized economy. The price level remains determinate under an optimal policy. We study the response of the model to “helicopter drops” of currency, steady increases in the money supply, and restrictions on private intermediation.

scholarly journals Relationship Between Energy Prices, Monetary Policy and Inflation; A Case Study of South Asian Economies

2014 ◽  
Vol 3 (1) ◽  
pp. 43-58
Author(s):  
Keyword(s):  
Monetary Policy ◽  
Side Effects ◽  
Interest Rate ◽  
Money Supply ◽  
Side Effect ◽  
Aggregate Demand ◽  
Oil Prices ◽  
Energy Prices ◽  
Aggregate Supply ◽  
The Cost

Abstract Monetary policy tools, including money supply and interest rate, are the most popular instruments to control inflation around the globe. It is assumed that a tight monetary policy, either in form of reduction in money supply or an increase in interest rate, will reduce inflation by reducing aggregate demand in an economy. However, monetary policy could be counterproductive if cost side effects of monetary tightening prevail. High energy prices may increase the cost of production by reducing aggregate supply in the economy. If tight monetary policy is used to reduce this cost push inflation, the cost side effect of energy prices will add to cost side effects of monetary tightening and will become dominant. In this case, the monetary policy could be counterproductive. Furthermore, simultaneous reduction in aggregate supply and aggregate demand will bring twofold reduction in output. Therefore greater care is needed in the use of monetary policy in the situation of cost push inflation. This article investigates the presence of cost side effect of monetary transmission mechanism, the role of international oil prices in domestic inflation, and implications for monetary policy. The findings suggest that both monetary policy and oil prices have cost side effects on inflation and monetary tightening could be counterproductive if used to reduce energy pushed inflationary trend.

Controlling Money Supply And Price Level With Unknown Regime Shifts: The Case Of Chile

2011 ◽  
Vol 24 (2) ◽  
Author(s):  
Abdulnasser Hatemi-J ◽  
Manuchehr Irandoust
Keyword(s):  
Monetary Policy ◽  
Steady State ◽  
Money Supply ◽  
Price Level ◽  
Regime Shifts ◽  
Font Size ◽  
Long Run ◽  
Causality Tests ◽  
The Relationship ◽  
Second Period

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;" lang="EN-GB"><span style="font-family: Times New Roman;">This paper investigates the relationship between money supply and price level using new tests for cointegration with two unknown regime shifts and bootstrap causality tests. Quarterly Chilean data from 1973: I to 2006: III is used. We find empirical evidence that the variables establish a long-run steady state relationship in the presence of two regime shifts. The elasticity of price level with regard to money supply is close to unity during the first period (prior to 1978: II). The elasticity is reduced during the second period (1978: III-1986: I) and it is also reduced for the remaining period but the reduction is smaller. We also conducted bootstrap causality tests that reveal the following: in the first sub-period there is bidirectional causality between the underlying variables. In the last two sub-periods money supply causes the price level only. This implies that money supply is weakly exogenous concerning the price level and that the monetary authority had enough independence to execute an active monetary policy in Chile. <span style="mso-bidi-font-weight: bold;"></span></span></span></p>

The 1738–41 Harvest Crisis in Scotland

2011 ◽  
Vol 90 (1) ◽  
pp. 27-63 ◽  
Author(s):  
Philipp Robinson Rössner
Keyword(s):  
Eighteenth Century ◽  
Business Cycle ◽  
Economic Impact ◽  
Economic History ◽  
Price Level ◽  
Aggregate Demand ◽  
Macro Level ◽  
Industrial Output ◽  
Industrial Economy ◽  
History Of

Between 1738 and 1741 Scotland experienced one of the harshest harvest crises and depressions in the eighteenth-century. After at least two consecutive harvest failures (in 1739 and 1740 and perhaps also in 1738) agrarian and industrial output contracted, the price level doubled, and average incomes fell below subsistence. Due to an increase in mortality, there was also a considerable contraction in aggregate demand. Data drawn from both the micro- as well as the macro-level shows the disastrous economic impact such deficient harvests – the depression's initial trigger – would have upon Scotland, a pre-industrial economy dominated by agriculture. Such shocks in agrarian supply tended to work out as general adverse shocks in aggregate supply, as the economy's business cycle was to a large extent determined by movements in the harvest cycle. The implicit task of the paper also is to point out the variety of available sources for, as well as one possible strategy of, writing a quantitative macro-economic history of eighteenth-century Scotland.

scholarly journals Relationship between Money, Output and Price Level in India: A Granger Causality Approach

2018 ◽  
Vol 4 (02) ◽  
Author(s):  
M. Manikandan ◽  
N. Mani ◽  
P. Karthikeyan
Keyword(s):  
Granger Causality ◽  
Money Supply ◽  
Price Level ◽  
Annual Data ◽  
Demand For Money ◽  
Causality Test ◽  
Time Series Method ◽  
Direction Of Causation ◽  
The Relationship ◽  
Casual Relationship

The relationship between money supply, income and prices is still a contentious concern mostly between the Keynesians and Monetarists. The Keynesians emphasise that a change in income reflects changes in money through demand for money, which means that there exists a unidirectional causality from income to money without any criticism. The Monetarists claim that money is the most important cause leading to changes in income and prices. Therefore, the direction of causation runs from money to income and prices without any feedback. This article studies the association between these macroeconomic aggregates using time series method of pair wise Granger causality test on annual data of the Indian economy over the period 1950-51 to 2012-13. Lag length is favoured by using standard criteria through VAR estimation. The Monetarists view is strongly supported by the result of this study. It is understood from the paper that the monetary policy has a force on the Indian macroeconomic variables as there is a casual relationship between money supply to inflation and income. Nevertheless, these relationships of variables are sensitive to lag length selections.

scholarly journals An Econometric Analysis of Price Behaviour in Pakistan

1973 ◽  
Vol 12 (4) ◽  
pp. 375-392 ◽  
Author(s):  
B. A. Azhar
Keyword(s):  
Price Level ◽  
Full Employment ◽  
Aggregate Demand ◽  
Labour Unions ◽  
Explanatory Variables ◽  
Price Increases ◽  
Demand Pull ◽  
Vast Literature ◽  
The Cost ◽  
Structural Theories

In this paper an attempt has been made to explore the major causes of price level changes in West Pakistan during the past thirteen years and to deter¬mine their relative importance in explaining the price fluctuations. A supple¬mentary object of the paper is to develop a predictive mechanism which may be used to forecast the response of price level to changes in the explanatory variables used in the regression model. There is vast literature on inflation theory [3] but not so much on quanti¬tative evidence. Broadly, there are three groups of theories of inflation: the demand pull theories, which state that inflationary pressures result from aggregate demand exceeding aggregate supply at full employment; the cost-push theories, which stress the producers' power to pass on cost increases in higher prices even when demand remains unchanged. The third group of theories, which take a mid-way position between the demand-pull and the cost-push theories, are a number of structural theories, notably those associated with the names of Ackley, Eckstein, and Schultze [1,5,11]. According to Ackley, inflation results from mark-up of prices. He considers the price policies of the firms and the wage policies of the labour unions to be responsible for inflation. He puts forward the hypothesis that mark ups used by business in setting prices and those applied by the labour unions to their cost of living for getting higher wages tend to rise in an inflationary situation which results in pyramiding of costs. Professor Otto Eckstein advances the hypothesis that inflation may be caused by price increases in certain bottleneck industries even when there is no over-all excess demand in the economy.

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