Jaege , Klaus
A icle
Economic Policy E ec i eness in Hicksian Analysis: A No e
K edi und Kapi al
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: Jaege , Klaus (1981) : Economic Policy E ec i eness in Hicksian Analysis: A No e,
K edi und Kapi al, ISSN 0023-4591, Duncke & Humblo , Be lin, Vol. 14, Iss. 2, pp. 177-179,
h ps://doi.o g/10.3790/ccm.14.2.177
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Economic Policy E ec i eness in Hicksian Analysis: A No e
By Klaus Jaege , Be lin
In a ecen issue o his Jou nal Ta las (1980) compa es wo e sions
o an IS-LM model wi h upwa d-sloping IS cu es (Cebula 1976, Silbe /
Bu ows 1971, 1974) wi h ega d o hei s abili y p ope ies. Acco ding
o Ta las he espec i e s abili y condi ions o bo h models en ail di -
e ing policy implica ions which he sums up in wo p oposi ions (p. 259).
Fo he sake o con enience hey a e epea ed he e:
P oposi ion
!: I he IS cu e slopes upwa d because all he p opensi ies o
spend wi h espec o income sum o mo e han uni y (Silbe /Bu ows), hen
he less he in e es -sensi i e is he demand o money, he soone does he
sys em eac o exogenous policy shocks. In he e en whe e he IS cu e
slopes upwa d due o a posi i e associa ion o in es men and consump ion
o he in e es a e (Cebula), he mo e in e es elas ic is he demand o
money he as e he sys em eac s o exogenous shocks.
P oposi ion 2:
In a Silbe /Bu ows amewo k, he s abili y ange o he
sys em eaches i s maximum alue as he in e es elas ici y o he demand
o money app oaches ze o. In a Cebula amewo k, howe e , he sys em
a ains i s maximum s abili y ange as he in e es elas ici y o he demand
o money app oaches minus in ini y.
The s abili y analysis and hence bo h p oposi ions a e based on he
assump ion (p. 255): .. ha he mone a y sec o adjus s ins an a-
neously3 o ex e nal shocks so ha he LM equa ion is always sa is ied
du ing he p ocess o adjus men om one equilib ium o ano he " and
acco ding o n. 3 (p. 255): "I should be no ed ha his assump ion does
no a ec he s abili y condi ions o he sys em in any way, ...".
In he ollowing i is shown ha his is no ue and as a co olla y
ha especially he i s pa s o bo h p oposi ions a e w ong.
Using he same no a ion as Ta las he linea adjus men -p ocess in
bo h models may be desc ibed mo e gene ally as:
a) ~d ==k[i(Y,i) + c<Y>*> -yJ
12 K edl und Kapi al 2/1981
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DOI h ps://doi.o g/10.3790/ccm.14.2.177 | Gene a ed on 2023-01-16 12:46:14
178 Klaus Jaege
di
(2) — = m [L (Y, i) - Mo] m,k = cons . > 0
d
Ta las assumes: k = 1, L (Y, i) = Mo and hence in his analysis m is
unspeci ied (o in ini e). De ining Y*, i* as he equilib ium alues o Y
and i espec i ely and y = Y
—
Y*, z = i
—
i* as de ia ions om hese
equilib ium alues he sys em (1) - (2) can be pu in o a linea and homo-
geneous o m by aking linea app oxima ions in he neighbou hood o
equilib ium (Taylo 's heo em):
(3) ~ = klIY + CY-l)y + k di + cy z
dz
(4) — = mLYy + mL{z
The sys em (3) - (4) has a s able equilib ium i he cha ac e is ic oo s
o he ma ix
( m
(ly + Cy - 1) k (I, + C )
mLy mhi
ha e nega i e eal pa s. Acco ding o he Ru h-Hu wi z heo em his
is he case, i De (A) > 0 and T (A) < 0, i.e. i
(5) (ly + Cy -
1)
Lj -
(Ii
+
Ci)
Ly > 0
and
(6) k (ly + Cy - 1) +mLi < 0
The ollowing es ic ions a e imposed on he sys em:
Cebula: ly + Cy - 1 < 0; Ii} C{ > 0; Ly > 0; U < 0.
Silbe /Bu ows: ly + Cy - 1 > 0; Iiy Ci <0; Ly > 0; U < 0.
In e es ing enough, wi h hese speci ica ions he Cebula model is
always s abel i only (5) is sa is ied, because (6) is nega i e o all
alues o
—
oo < Li < 0 bu his is no ue wi hin he model o Silbe /
Bu ows; his is he poin which Ta las missed. As Li app oaches
ze o, (6) becomes posi i e and hence he equilib ium in a Silbe /Bu -
ows amewo k is in his case uns able o he gene alized adjus men -
p ocess (1) - (2) wi h k, m > 0.
Fu he mo e, assuming s abili y in he Silbe /Bu ows model, om
(6) he ange o Li is (i (5) is sa is ied): - oo < Li < —^-(Jy + Cy - 1).
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Economic Policy E ec i eness in Hicksian Analysis: A No e 179
k
Consequen ly, as L* app oaches — — (ly + Cy — 1), he le -hand side
o (5) becomes mo e posi i e bu he le -hand side o (6) becomes
simul aneously less nega i e and hence no hing can be said abou he
sys em's eac ions o policy changes. The e o e only o he special case
m = 0 he i s pa s o Ta las' wo p oposi ions a e co ec .
One las poin mus be men ioned. F om (5) and (6) i ollows ha
s abili y in he Silbe /Bu ows model is only gua an eed, i
I (ly + Cy - 1) L,|<|(I, +
c )
Ly | , i.e. i
¿(Iy + Cy-l)2<|(Ii + Ci) Ly|
k
is sa is ied. Hence o all alues o L*< (ly + Cy — 1) he equi-
771
lib ium in his model is likely o be a saddle poin i he disequilib ium
adjus men -p ocess on he commodi y ma ke is as compa ed wi h he
p ocess in he mone a y sec o (g ea alues o c/m).
Re e ences
Bu ows, Paul: The Upwa d Sloping IS Cu e and he Con ol o Income
and he Balance o Paymen s, in: Jou nal o Finance, Vol. 29, 1974, 955 - 961.
— Cebula, Richa d J.: A B ie No e an Economic Policy E ec i eness, in:
Sou he n Economic Jou nal, Vol. 43, 1976/77, 1174 - 1176. — Silbe , William L.:
Mone a y Policy E ec i eness: The Case o a Posi i ely Sloped IS Cu e, in:
Jou nal o Finance, Vol. 26, 1971, 1077 - 1082. — Ta las, Geo ge S.: Economic
Policy E ec i eness in Hicksian Analysis: An Ex ension, in: K edi und
Kapi al, 13. Jah g., He 2, 1980, 252 - 262.
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DOI h ps://doi.o g/10.3790/ccm.14.2.177 | Gene a ed on 2023-01-16 12:46:14