Monetary disequilibrium theory is a product of the monetarist school and is mainly represented in the works of Leland Yeager and Austrian macroeconomics. The basic concepts of monetary equilibrium and disequilibrium were, however, defined in terms of an individual's demand for cash balance by Mises (1912) in his Theory of Money and Credit.

History of the concept

Leland Yeager's (1968) understanding of the monetary disequilibrium theory begins with fundamental properties of money.

Monetary-disequilibrium is a short-run phenomenon as it contains within itself the process by which a new equilibrium is established i.e. through changes in the price level. If the demand for real balances changes, either the nominal money supply or price level can adjust to monetary equilibrium in the long run as seen from the figure.

Early monetary-equilibrium theory

Swedish economist Knut Wicksell (1898) was one of the main propagators of the theory. He was primarily concerned with the behavior of the general price level, as influenced by interest rates. As described by Gunnar Myrdal in 1939, the definition given by Wicksell was based on the existence of three conditions.

The representative of the British monetary-equilibrium approach was mainly Dennis Robertson.

Mises relationship to the theory is ambiguous. According to Ludwig von Mises, monetary equilibrium happens first at the individual level. Each actor wants to keep a cash balance on hand for future transactions, say, both planned and contingent. This desired money balance of the individual constitutes his money demand and is based on his subjective valuation of holding money compared to their valuation of obtaining more goods and services. The amount of the money that the individual possess is his supply of money. Individuals will try to equate their desired and actual cash holdings through their spending behavior.

  1. As the name suggests the monetary-disequilibrium theory is a strictly monetary explanation of a set of economic phenomenon. It does not take into account the real economic factors like real savings or market processes that influence business cycles.

Footnotes

Further reading

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  • Herschel I. Grossman, 1987."monetary disequilibrium and market clearing" in The New Palgrave: A Dictionary of Economics, v. 3, pp. 504–06.
  • The New Palgrave Dictionary of Economics, 2008, 2nd Edition. Abstracts:

:"monetary overhang" by Holger C. Wolf.

:"non-clearing markets in general equilibrium" by Jean-Pascal Bénassy.

:"fixprice models" by Joaquim Silvestre. "inflation dynamics" by Timothy Cogley.

:"temporary equilibrium" by J.-M. Grandmont. As 2007 working paper.

  • Clark Warburton, 1966. Depression, Inflation, and Monetary Policy; Selected Papers, 1945-1953 Johns Hopkins Press. Evaluation in Anna J. Schwartz, Money in Historical Perspective, 1987.
  • Knut Wicksell, 1898. Interest and Prices, tr. R.F. Kahn. Macmillan, 1936 . Chapter links, pp. v-vi.
  • Leland B. Yeager, 1997. The Fluttering Veil: Essays on Monetary Disequilibrium. Description, table of contents (scroll down), and review in Cato Journal, 1998, (scroll down to) pp. 156-61.