Monetary equilibrium and price stickiness reconsidered: A reply to Bagus and Howden

Monetary equilibrium and price stickiness reconsidered: A reply to Bagus and Howden Bagus and Howden (Review of Austrian Economics 24(4): 383–402, 2011) argue that price stickiness is a poor justification for advocating a flexible money supply through the issuing of fiduciary media under central or free banking. They view the contraction in output following an exogenous increase in money demand as an optimal response, worry about redistribution effects from the issuance of fiduciary media, and claim a changing money supply complicates economic calculation. Accepting their view that the contraction in output is an optimal response to an exogenous change in money demand, we still find a potentially beneficial role for monetary policy (under central banking) or fractional reserve note issue (under free banking). We show that even if all prices were perfectly flexible, changes in the money supply to offset changes in money demand might still be desirable. We point out several errors and mischaracterizations in their article, justify our decision to disregard wealth transfers, and discuss how a flexible money supply might facilitate economic calculation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Austrian Economics Springer Journals

Monetary equilibrium and price stickiness reconsidered: A reply to Bagus and Howden

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Publisher
Springer US
Copyright
Copyright © 2012 by Springer Science+Business Media, LLC
Subject
Economics; Public Finance; Political Science; History of Economic Thought/Methodology
ISSN
0889-3047
eISSN
1573-7128
D.O.I.
10.1007/s11138-012-0184-6
Publisher site
See Article on Publisher Site

Abstract

Bagus and Howden (Review of Austrian Economics 24(4): 383–402, 2011) argue that price stickiness is a poor justification for advocating a flexible money supply through the issuing of fiduciary media under central or free banking. They view the contraction in output following an exogenous increase in money demand as an optimal response, worry about redistribution effects from the issuance of fiduciary media, and claim a changing money supply complicates economic calculation. Accepting their view that the contraction in output is an optimal response to an exogenous change in money demand, we still find a potentially beneficial role for monetary policy (under central banking) or fractional reserve note issue (under free banking). We show that even if all prices were perfectly flexible, changes in the money supply to offset changes in money demand might still be desirable. We point out several errors and mischaracterizations in their article, justify our decision to disregard wealth transfers, and discuss how a flexible money supply might facilitate economic calculation.

Journal

The Review of Austrian EconomicsSpringer Journals

Published: Jul 7, 2012

References

  • Monetary equilibrium and price stickiness: Causes, consequences, and remedies
    Bagus, P; Howden, D

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