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Monetary Theory

Alan A. Rabin

Alan Rabin argues that new Keynesian and new classical macroeconomics, which have dominated the literature and textbooks, have crowded the monetary-disequilibrium hypothesis, or orthodox monetarism, off the intellectual stage. Trying to remedy this imbalance, the author concentrates on what he judges to be the essentials of monetary theory.
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Chapter 5: Patinkin’s Monetary Theory and Extensions

Alan A. Rabin


PATINKIN’S CONTRIBUTION We have been considering how money affects spending and how an excess demand for or excess supply of money weakens or strengthens demand relative to supply on the markets for individual goods and services and securities. All this reconciles with Patinkin’s (1956, 1965) superficially rather different exposition of the ‘strict’ or ‘rigid’ quantity theory. (Pages 124–5 above distinguish between broad and strict versions of the theory; for the latter, it is necessary that only fiat money exists.) Going beyond mere mechanics and algebraic tautologies, his work explains the role of the real-balance effect in the logic of the theory. It builds bridges between macroeconomics and microeconomics, tracing macro phenomena of prices and incomes back to the decisions of individual economic units. Along with presenting his positive analysis, Patinkin clears up some inconsistencies in earlier monetary theory. Patinkin shows that several assumptions apparently necessary for the strict quantity theory are not in fact necessary. For example, omission of the interest rate from Fisher’s equation of exchange seems to presuppose that that rate does not affect the demand for or velocity of money. Actually, the theory requires no such assumption. The conditions that are necessary are not fully met in the real world, which helps explain why the quantity theory does not hold rigidly true. Yet the forces Patinkin describes, notably the real-balance effect, do indeed operate in reality. COMPARATIVE STATICS At one stage of his exposition, Patinkin (1954, pp. 132–4) presents a comparative-static analysis of the equilibriums...

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