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2015 | OriginalPaper | Buchkapitel

2. Price Theory in a Monetary Economy

verfasst von : Masayuki Otaki

Erschienen in: Keynesian Economics and Price Theory

Verlag: Springer Japan

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Abstract

Price theory in a monetary economy is outlined in this chapter. Prices are considered to equalize demand and supply in a barter economy. However, the function of price changes entirely in a monetary economy. As is evident from daily life, the value of money (the inverse of the price index) is determined by rational belief concerning its future value in itself. If individuals confirm the future devaluation of money, this immediately raises the current price level. In turn, if they are confident about the value of money, the price level becomes stable. However, goods markets are adjusted not by price but by quantity. Thus, when monetary theory is recognized to have intrinsic dynamic properties, quantity adjustment such as the multiplier process emerges consistently with neoclassical microeconomic theory. In addition, the theory outlined in this chapter contains the quantity theory of money as an extraneous rational belief under conditions of market equilibrium.

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Vorheriges Kapitel Introduction

Nächstes Kapitel The Existence of an Involuntary Unemployment Equilibrium

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Although equilibrium in the new Keynesian model suggests that resource allocation is second best, and that leisure is excessively long and consumption levels below the optimum, such properties do not emerge from the shortage of effective demand, but from distorted pricing owing to monopolistic behavior. Thus, imperfect unemployment in the new Keynesian models is rooted in distortions found on the supply side, not on the demand side.

Although it is enough to define the true index by stating that the utility function from the consumption stream is homothetic, this assumption is too weak when the level of the incentivized wage is determined.

The spurious multiplier of Mankiw (1988) is derived by the following economic causality. Since he assumes static monopolistic competition, the real wage is lower than the Walrasian equilibrium, and thus excess leisure (underemployment) occurs. When the government levies a lump-sum tax, the income effect reduces the leisure and people begin to work more. Thus, government expenditure is not essential for this model. However, it is apparent that such a policy reduces economic welfare unless the government expenditure brings about some additional utility, as shown by Startz (1994).

It can be shown that money is not super neutral in this model if \(\kappa\) is assumed to be unrelated to the inflation rate, although Lucas’ (1972) monetarist model preserves this property. Such differences stem from the money-supply rule that the government adopts. This problem is analyzed in more detail in Part 5.

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Titel: Price Theory in a Monetary Economy
verfasst von: Masayuki Otaki
Verlag: Springer Japan
Buch: Keynesian Economics and Price Theory
Print ISBN: 978-4-431-55344-1

Electronic ISBN: 978-4-431-55345-8

Copyright-Jahr: 2015
DOI: https://doi.org/10.1007/978-4-431-55345-8_2