A monetary overhang emerges when individuals jointly hold more money than they wish and all adjustment processes are rendered unavailable through price and quantity controls. While monetary overhangs can in principle be eliminated through increased real money demand, their magnitude in practice typically implies a resolution through a reduction in real money supply through a cut in the nominal money supply or through higher prices. The former is impeded by the difficulty of estimating the appropriate reduction, the latter risks triggering sustained inflation in the presence of distorted relative wage and price structures.
KeywordsForced saving Inflation Monetary overhang Money supply Price control Price liberalization Repressed inflation Velocity of circulation
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