Econometrica Vol. 41 No. 6 1973
The Stability of Models of Money and Growth with Perfect Foresight
Abstract
SEVERAL ECONOMISTS2 have argued that if individuals correctly perceive the rate of inflation so that their expectations are rational, then deterministic models of money and economic growth are unstable. In this view, points on the steady state equilibrium paths examined by Tobin [9] and others are saddlepoints, there being a tendency to diverge more and more from such a path as time elapses if the system is not initially on the path. The source of instability is understood most easily in the context of a model in which money is neutral, with real growth and capital accumulation both being exogenous with respect to the money supply and price level and, moreover, with both equaling zero. Time is continuous. The price level P and money supply M are assumed at each moment to satisfy the demand function for real balances
- DOI
- 10.2307/1914034
- Volume
- 41
- Issue
- 6
- Pages
- 1043
- Sources
- bibtex:phds-export.bib openalex crossref