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Monetary equilibrium and price stickiness: Causes, consequences and remedies

  • Philipp Bagus
  • David Howden
Article

Abstract

We assess monetary equilibrium theory by focusing on its foundation—price stickiness—and answer several ancillary questions. Prices are sticky at times. Contra monetary equilibrium theorists, this is not a reason to advocate an issuance of fiduciary media to counteract the effects of a sluggish price adjustment process. Issuances of fiduciary media will breed negative effects, primarily via wealth redistributions, faulty interest rate signals and exacerbated business cycles. Allowing the price level to adjust to maintain monetary equilibrium provides for fewer detrimental effects than adjusting the supply of credit.

Keywords

Rigidities Sticky prices Monetary equilibrium theory Free banking 100% Reserve banking 

JEL classification

E52 E58 

Notes

Acknowledgements

The authors would like to thank two anonymous referees. The usual disclaimer applies.

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of Applied Economics IUniversidad Rey Juan CarlosMadridSpain
  2. 2.Department of Business and EconomicsSt. Louis University–Madrid CampusMadridSpain

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