Monetarism and Monetary Economics A Delayed Comment

F isch, Helmu A icle Mone a ism and Mone a y Economics A Delayed Commen K edi und Kapi al P o ided in Coope a ion wi h: Duncke & Humblo , Be lin Sugges ed Ci a ion: F isch, Helmu (1977) : Mone a ism and Mone a y Economics A Delayed Commen , K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 10, Iss. 3, pp. 321-335, h ps://doi.o g/10.3790/ccm.10.3.321 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/292794 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ Mone a ism and Mone a y Economics A Delayed Commen By Helmu F isch, Vienna The s ong eac ion o P o esso Maye 's pape "The S uc u e o Mone a ism"1 indica es ha he has ouched upon a cen al heme o he con empo a y heo e ical discussion. Th. Maye by using 12 p oposi- ions which a e o a ying impo ance has cha ac e ized p esen -day mone a ism. In his no e I concen a e on his i s p oposi ion: he p e- dominance o he impac o mone a y ac o s on nominal income ( he Neo-quan i y heo y o money). My poin in chap. I is ha he Neo- quan i y heo y is comple ely i ial as a heo y o nominal income i a mone a y impulse canno be di ided in a eal e ec (ou pu and em- ploymen e ec ) and in a p ice e ec . This is shown by appeal o he so-called accele a ions- heo em, which is o mula ed by a me ging o wo F iedman models.2 The ew empi ical s udies which exis make i , howe e , ques ionable, whe he one can speak o a "dominance" o a mone a y impulse on ou pu and p oduc ion. In chap. II a neglec ed aspec o he mone a is ansmission p ocess (p oposi ion 2 in Th. Maye s lis ): he o ma ion o in la iona y expec- a ions is conside ed. The e I claim ha he accele a ions heo em is compa ible wi h adap i e expec a ions, bu no wi h he model o a- ional expec a ions. Acco ding o he la e a mone a y impulse would only gene a e in la iona y and no eal e ec s. Newe empi ical wo k con eys he imp ession ha o he USA in he pe iod a e he II. Wo ld Wa , he accele a ion o decele a ion o he a e o mone a y expansion has no been an icipa ed. The e o e he accele a ions heo em seems o be mo e compa ible wi h he empi ical e idence han does he model o a ional expec a ions. 1 Th. Maye , The S uc u e o Mone a ism, K edi und Kapi al, Vol.8 (1975) p. 191 - 215 and p. 293 - 313. 2 M. F iedman, A Theo e ical F amewo k o Mone a y Analysis, J. P. E. 78 (1970) p. 193 - 238. A Mone a y Theo y o Nominal Income, J. P. E. 79 (1971) p. 323 - 37. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 322 Helmu F isch Fu he i is su p ising ha Th. Maye neglec s he "c owding-ou " e ec , which some au ho s ( o example J. S ein3) conside as he main di e ence be ween Mone a is s and Neo-Keynesians. The c owding-ou e ec claims ha go e nmen spending no accompanied by mone a y expansion, i. e. inanced by axes o bo owing om he public esul s in a c owding-ou o p i a e expendi u e wi h li le i any inc ease in o al spending. The neglec o he "c owding-ou " is an exp ession o op imism conce ning he s abiliza ion policy o he go e nmen , whe e- as s essing i emphasize he opposi e. Chap. Ill discusses he "c owd- ing-ou '' e ec as a no iceable di e ence be ween Mone a is s and Neo- Keynesians. The undamen al di e ence, howe e , be ween mone a ism and mon- e a y economics in gene al is o be ound in he 's abili y conjec u e' acco ding o which he p i a e sec o o he economy is inhe en ly s able (Chap. IV). This pos ula e o as Th. Maye o en emphasizes "belie " belongs o he "p esupposi ions" (A. Leijonhu ud) o he mon- e a is s and is always o mula ed as a con as o he 'ins abili y pos- ula e' o Keynesian economics. A e a discussion o a mo e ope a ional concep o s abili y i is poin ed ou ha he olde mone a is s such as K. Wicksel, G. My dal and F. A. Hayek used ins ead o he s abili y conjec u e he concep o he 'cumula i e' p ocess which es s on he assump ion ha he mone a y sec o o he economy (in con as o he eal sec o ) is uns able, since a disc epancy be ween he eal a e and he ma ke a e o in e es mo es he sys em away om equilib ium by a sequence o expendi u es and p ice changes. I. The Accele a ions Theo em The ecen e o mula ion o he quan i y heo y is he accele a ions heo em. I implies ha only an accele a ion o a decele a ion o he a e o money g ow h p oduces any eal e ec s, i. e. employmen and ou pu e ec s, while a cons an a e o g ow h o he quan i y o money de e mines he a e o in la ion. Fo example Laidle 's o mula ion is: "The e ec s o a change in he a e o change o money supply a e el ini ially on he le el o eal income and he a e o in la ion, bu in he long un i is only he a e o in la ion ha is a ec ed."4 3 J. L. S ein, Inside he Mone a is Blackbox, in J. L. S ein ed. "Mone- a ism", p. 183 - 232, Ams e dam (1976). 4 D. Laidle , An Elemen a y Mone a is Model o Simul aneous Fluc ua- ions in P ices and Ou pu , in H. F isch ed., "In la ion in Small Coun ies", OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 Mone a ism and Mone a y Economics 323 In M. F iedman's (1970, 1971), D. Laidle 's (1976) and K. B unne 's (1970)5 model he accele a ions heo em appea s wi h a u he conjec- u e, namely ha he impac o mone a y accele a ion (decele a ion) has only a empo a y e ec on ou pu and employmen . Bo h p oposi- ions can be ound in a pa icula ly simple o mula ion in F iedman's model. Me ging bo h his heo e ical models (1970, 1971) he ollowing heo e ical ske ch is ob ained: (1) JZ = N* + <x(y -y*)+y (log X - log X*) (2) x = x* + (l -oc)(y-y*)-y (log X - logX*) (3) y = y*+ 1 (m - y*) Lis o Symbols: n ... a e o in la ion x ... a e o g ow h o eal income y ... a e o g ow h o nominal income X ... le el o eal income m ... a e o g ow h o money R ... a e o change o he eloci y o money i ... adjus men coe icien o in la iona y expec a ions This sys em o h ee linea di e en ial equa ions exp esses he ac- cele a ion heo em e y clea ly. I in (3) he exogenous a e o g ow h o he quan i y o money inc eases compa ed o he expec ed a e o g ow h o nominal income (m > y*), a posi i e di e ence (y — y*) a ises. Equa ions (1) and (2) show how ha de ia ion o he ac ual a e om he expec ed a ec s he a e o in la ion n and he a e o g ow h o eal income x. The pa ame e s a and (1 — a) can be in e p e ed as p ice elas ici ies and p oduc ion elas ici ies. The sys em demons a es a causal di ec ion. An inc ease in he g ow h a e o money supply p o- duces eal e ec s ia equa ions (1) and (2), he magni ude o which is se by he a io a/1 — a. An expec a ions adjus men p ocess o he ype: — {y*) = i (y — y*) d inc eases y* in he s a e o disequilib ium un il y = y* = m. In he new Lec u e No es in Economics and Ma hema ical Sys ems, Sp inge -Ve lag, Be lin-Heidelbe g-New Yo k (1976) p. 76. 5 K. B unne , The Mone a is Re olu ion in Mone a y Theo y, Wel wi - scha liches A chi , 105 (1970). 21 K edi und Kapi al 3/1977 OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 324 Helmu F isch s eady s a e he e ec o an inc ease o he g ow h a e o he quan- i y o money on he eal a iables ha e disappea ed and all ac ual a es o g ow h a e equal o he an icipa ed. I i is in ended o p oduce eal e ec s again he a e o money g ow h m has o be aised again. A pe manen e ec on he eal sys em can only be made possible by a pe manen accele a ion o he g ow h o he quan i y o money. The accele a ions heo em ag ees wi h he i s Maye -p oposi ion conce ning he "p edominance o he impac o mone a y ac o s on nominal income" and i con ains some elemen s o he mone a is ans- mission p ocess. Two ques ions a ise immedia ely: (1) The accele a ions heo em is an empi ical hypo hesis and he eby examinable. The only s udy o my knowledge which has a emp ed o subjec he accele a ions heo em o a di ec s a is ical es is om P. Ko eweg (1976) and is based on he Du ch economy om 1955 o 1972. In his s udy he "mone a y impulse hypo hesis" com- pe es wi h he " iscal impulse hypo hesis" and he " o eign impulse hypo hesis". P. Ko eweg concludes: "No ejec ed a e he weak o eign and mone a y impulse hypo hesis. Tha is: changes in ou - pu g ow h wi hou o eign and mone a y impulses a e highly un- likely".6 The empi ical esul s do no oppose he accele a ions heo em; howe e hey oppose i s in e p e a ion in a causal sense, in ha an accele a ion o he money supply always gene a es a change in eal p oduc ion.7 A change in he eal a e o g ow h is always co ela - ed wi h changes in he a e o g ow h o money supply; bu no e e y change in he a e o money expansion induces a change in he eal a e o g ow h. (2) The du a ion o he esd e ec s depends on he speed o adjus men o expec a ions and he eby leads o he ques ion, which concep o expec a ion o ma ion is compa ible wi h he mone a is heo y. 6 P. Ko eweg, In la ion, Economic Ac i i y and he Ope a ion o Fiscal, Fo eign and Mone a y Impulses in he Ne he lands — A P elimina y Ana- lysis 1953 - 1973, De Economis (1975) p. 616. 7 Acco ding o he weak e sion o he impulse hypo hesis, he pheno- menon will no occu wi hou he impulse; acco ding o i s s ong e sion, he phenomenon will occu any ime he impulse speci ied occu s. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 Mone a ism and Mone a y Economics 325 II. Endogenous Expec a ions The cen al ques ion conce ning he p ocess o expec a ion o ma ion is no analysed in Th. Maye 's "S uc u es", al hough i is p ecisely he expec a ions which play a undamen al ole in unde s anding he ac- cele a ions heo em, as well as he mone a is s ansmission p ocess. The accele a ion heo em is compa ible wi h he adap i e-expec a ions model, which is explici ly o implici ly accep ed by he majo i y o mone a is s au ho s (M. F iedman 1970, 1971), (K. B unne 1970), (D. Laidle 1976). I he economic agen s beha e acco ding o he model o adap i e expec a ions, he eal a iables o he sys em (ou pu and em- ploymen ) can be changed h ough a change in he a e o change o money supply, because o he appea ance o an unan icipa ed in la ion. Le us conside he si ua ion in he labo ma ke , which is usually neglec ed by he mone a is s (E. Claassen8). I we s a wi h a s eady s a e si ua ion in which money wages {w) g ow a he a e o inc ease o ma ginal p oduc i i y o labo g and he expec ed a e o in la ion, 7i* we ha e: W = g + JZ* The a e o g ow h o he ma ke eal wage, howe e , is w — n, whe e n is he ac ual a e o in la ion: w — n = g + ( * — n) . I a non-an icipa ed in la ion de elops due o he accele a ion o money supply, he ma ke eal wage d ops below he ma ginal p oduc- i i y o labo and (assuming p o i maximizing i ms) he a e o un- employmen is lowe ed below i s "na u al" le el u* (co esponding o he s a e o a ai s in which in la ion is ully an icipa ed n = JT*). This si ua ion could be demons a ed by he ollowing (linea ized) adjus - men p ocess: The inc ease in employmen is p opo ional o he en abili y di e - ence g — (w — i). 8 E. Claassen, Sho -Pe iod Fluc ua ions in Nominal and Real Income: A Mone a is Model, in E. Claassen and P. Salin ed. "S abiliza ion Policies in In e dependen Economies", No h-Holland (1972). 21* OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 326 Helmu F isch Howe e he adap i e expec a ions adjus men model implies ha money wages ise as long as he e is a posi i e di e ence (j — n*). When (7i — 7i*) = 0 he p e ious eal wage is eached again, he a e o unemploymen is equal o u* again, bu he a e o in la ion is pe - manen ly highe . Any u he a emp o lowe u* below u equi es a highe a e o expansion o he money supply. An accele a ion o he a e o g ow h o he money supply induces eal e ec s only when a non-an icipa ed in la ion esul s, which empo a ily lowe s he ma ke eal wage below he ma ginal p oduc o labo . The e o e we ha e he ollowing lemma: The accele a ions heo em is explained by he exis ence o a non- an icipa ed in la ion which is a consequence o he change in he a e o money supply. While au ho s as M. F iedman (1970, 1971), D. Laidle (1976) o J. S ein (1976) (in his "syn he ic" model) ha e o mula ed an adap i e ex- pec a ions p ocess, ano he g oup o au ho s, mone a is s "in a b oad sense", — such as Th. Sa gen 9, Th. J. Sa gen and N. Wallace10 and R. E .Lucas11 ejec adap i e expec a ions as a was e o in o ma ion, p e- e ing a he " a ional" expec a ions. The cen al idea o he a ional expec a ions hypo hesis (REH) is ha he expec a ion o an economic a iable "depends in a p ope way on he same hings ha economic heo y says ac ually de e mine ha a iable" (Th. J. Sa gen and W. Wallace, 1975). Mo e p ecisely: a ional expec a ions o in la ion a e un- biased es ima o s o he ac ual in la ion a e n , gi en all in o ma ion a he beginning o he pe iod. F om a heo e ical poin o iew " a ional expec a ions" ende he accele a ions heo em in alid. Since any economic agen knows he model, each change in he a e o g ow h o money supply leads no only o a change in he ac ual in la ion a e bu also in he expec ed a e o in- 9 Th. J. Sa gen , Ra ional Expec a ions, The Real Ra e o In e es , and he Na u al Ra e o Unemploymen , B ookings Pape son Economic Ac i i y, 2 (1973). 10 Th. J. Sa gen and N. Wallace, Ra ional Expec a ions, he Op imal Mone a y Ins umen , and he Op imal Money Supply Rule, J. P. E. 83 (1975), p. 241 - 54. 11 R. E. Lucas, J ., Econome ic Tes ing o he Na u al Ra e Hypo hesis, in O. Ecks ein, ed. "The Econome ics o P ice De e mina ion", Washing on, D. C. (1972) p. 50 - 59. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 Mone a ism and Mone a y Economics 327 la ion, so ha an impac on he eal a iables o he sys em is ex- cluded. In con as , he econome ic applica ion o he concep o a ional ex- pec a ions seems o suppo he accele a ions heo em. Especially in- o ma i e is an econome ic a emp by R. J. Ba o12 o he USA (1976). The wo k can be conside ed as an econome ic es o he accele a- ions heo em and he concep o a ional expec a ions. The hypo hesis ha o ms he basis o his s udy is ha only unan icipa ed changes in money ha e e ec s on eal economic a iables like he unemploymen a e and he le el o ou pu . Tha hypo hesis was quan i ied by in e - p e ing he "sys ema ic pa " (= an icipa ed money g ow h) o he money supply as he amoun ha could ha e been p edic ed based on a educed o m equa ion, whe e money g ow h is explained by he "no mal ede al budge ", he lagged a e o money g ow h and he lagged a e o unemploymen . Unan icipa ed money g ow h was meas- u ed as ac ual g ow h less he amoun ob ained om his p edic ed ela ion (m — m *). The cu en and wo annual lag alues o unan i- cipa ed money g ow h we e shown o ha e conside able explana o y alue o unemploymen and ou pu acco ding o he accele a ions heo em. The esul s show ha om 1961 - 1967 in a pe iod o ela i - ely cons an g ow h he "unan icipa ed" a e o money expansion was e y small; howe e he accele a ion o he money supply 1968 (+ 2.5 °/o) was no an icipa ed and his b ough he a e o unemploy- men down o 3.5 % below he es ima ed "na u al le el". An unan i- cipa ed mone a y con ac ion 1960 (— 3.9 •%) accoun ed o a sha p ise in he unemploymen a e o 6.7 %>. The empi ical e i ica ion speaks o he accele a ions heo em and agains he REH. R. Ba o's esul shows ha o he USA o he pe iod 1960 - 1975 an accele a ion (de- cele a ion) o he a e o money supply was egula ly no (!) an icipa ed and i he eby led o changes in employmen and ou pu . Why does he empi ical e idence speak o he accele a ions heo em and no o he REH? The e a e se e al easons: (1) Exis ing p ice ag eemen s and wage con ac s make sho - un changes di icul , so ha o pa s o he p ice- and wage sys em adap i e beha iou again appea s ealis ic.13 12 R. J. Ba o, Unan icipa ed Money G ow h and Unemploymen in he Uni ed S a es, A. E. R. 67 (1977). 13 See W. Poole, Ra ional Expec a ions in he Mac o Model, B ookings Pape s on Economic Ac i i y 2, (1976) p. 484 . OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 328 Helmu F isch (2) Economic agen s migh o m condi ional ma hema ical expec a- ions using an economic model and in o ma ion abou exogenous a iables in , bu di e en agen s migh ha e di e en models. People a e a ional wi h espec o hei model; bu he same in- o ma ion migh con ey di e en meanings o di e en economic agen s. (3) The egula appea ance o a signi ican unan icipa ed a e o mon- ey supply, whene e he a e o money supply changes, shows ha economic agen s know he p e-de e mined a iables o he model bu no all exogenous a iables a ime , when hey make hei p edic ions. (Fo example, he iscal policy a iable in — 1, bu no he alue o ha a iable in ). (4) The accele a ions heo em can be iewed as a special a ian o he hypo heses ha only he unan icipa ed pa o changes in he a e o money expansion has e ec s on he eal economic a iables. III. The C owding-ou E ec I is in e es ing o no e ha Th. Maye did no discuss he c owding- ou e ec as a poin di e en ia ing mone a ism om Keynesian eco- nomics. The c owding-ou e ec deals wi h he di e en ways o i- nancing a budge de ici . "Whe he de ici s p oduce in la ion depends on how hey a e inanced. I , as so o en happens, hey a e inanced by c ea ing money, hey unques ionably do p oduce in la iona y p essu e. I hey a e inanced by bo owing om he public, a wha e e in e es a es a e necessa y, hey may s ill exe some mino in la iona y p es- su e. Howe e , hei majo e ec will be o make in e es a es highe han hey would o he wise be." (M. F iedman, 1972)14 The c owding-ou e ec emphasized by M. F iedman and he econ- ome icians o he S . Louis15 model s esses he ac ha go e nmen spending no accompanied by mone a y expansion, ha is inanced by axes o bo owing o m he public esul s in a c owding-ou o p i a e expendi u e wi h li le i any ne inc ease in o al spending. 14 M. F iedman, Commen s on he C i ics, in R. J. Go don, ed., "Mil on F iedman's Mone a y F amewo k", The Uni e si y o Chicago P ess (1974), p. 140. 15 L. C. Ande sen and K. M. Ca lson A Mone a is Model o Economic S abiliza ion, Fede al Rese e Bank, S . Louis Re . (1970). OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04 Mone a ism and Mone a y Economics 335 "s abili y conjec u e". This conjec u e is no an ope a ional concep and belongs o he "Wel anschauung" o he mone a is school o hough . A e a discussion o a mo e ope a ional concep o s abili y i is poin ed ou ha olde mone a is s such as Wicksell and Hayek used ins ead o he s abili y conjec u e he concep o he "cumula i e" p ocess, which implies ha he mone a y sec o o he economy is inhe en ly uns able. Résumé Moné a isme e héo ie économique moné ai e Dans son essai «The s uc u e o moné a ism», le P o esseu Maye a ca ac é isé l'ac uel «moné a isme» pa 12 p oposi ions. La p ésen e é ude s'in é esse p incipalemen à la nou elle o mula ion de la héo ie de la quan i é (P emiè e p oposi ion dans l'essai de Maye ) ainsi qu'au « pos ula de la s abili é » des moné a is es. La héo ie néo-quan i a i e s'exp ime dans le héo ème de l'accélé a ion, selon lequel l'ac i a ion de l'expansion de la masse moné ai e engend e des e e s éels, alo s qu'en modèle s a ique (s eady s a e), le aux d'expansion de ce e masse n'in luence que le aux d'in la ion. L'au eu démon e que le héo ème de l'accélé a ion implique des expec a i es adap ables; des expec a i es a ionelles éca e aien an icipa- i emen les e e s éels d'une modi ica ion de l'o e de monnaie.Aux E a s- Unis, des eche ches empi iques on é abli qu'ap ès la seconde gue e mon- diale l'accélé a ion ou la décélé a ion de la masse moné ai e n'é ai égu- liè emen pas an icipée, de so e que le héo eme de l'accélé a ion semble plus compa ible a ec l'é idence empi ique qu'a ec des expec a i es a ion- nelles. La di é ence ondamen ale en e le moné a isme e l'économie moné ai e consis e en l'accep a ion ou le eje du «pos ula de la s abili é» qui eu que l'économie de ma ché soi s able en elle-même. L'on dé ini le moné a isme comme é an la héo ie économique moné ai e complé ée du «pos ula de la s abili é ». Ce concep n'a aucun ca ac è e opé a ionnel, mais pa icipe plu ô de la philosophie de l'o ien a ion moné a is e. D'anciens « moné a is es » els K. Wicksell e F. A. Hayek exploi en non pas le pos ula de la s abili é mais le concep du p ocessus cumula i qui implique l'ins abili é inhé en e du domaine moné ai e. OPEN ACCESS | Licensed unde CC BY 4.0 | h ps://c ea i ecommons.o g/abou /cclicenses/ DOI h ps://doi.o g/10.3790/ccm.10.3.321 | Gene a ed on 2023-01-16 12:42:04