Re: Tom Palley on AS/AD

["J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>]

      And, one other thing:  AS/AD does NOT require
a fixed money supply, although several people on this
list have asserted that it does.  Certainly to make the
"Keynes effect" argument or the more standard
version of the "Pigou effect" argument for why AD
slopes down one does.  But the international sub
effect does not rely on that.
      I don't see what the behavior of the money supply
has to do at all with the shape of the AS curve, which,
as I have already indicated, is the more important issue.
Barkley Rosser
-----Original Message-----
From: Michael Perelman <michael@xxxxxxxxxxxxxxxxx>
To: pen-l@xxxxxxxxxxxxxxxxxxx <pen-l@xxxxxxxxxxxxxxxxxxx>
Date: Wednesday, August 30, 2000 10:33 AM
>Subject: [PEN-L:967] Tom Palley on AS/AD


>Dear Jim,
>
>Thank-you for your kind words about my book on PK Economics. Some
>observations:
>
>(1) Romer's AD schedule is in fact the IS schedule. His model is IS-LM
>with a horizontal LM. The monetary authority is just setting the
>interest rate - something lots of PKs have maintained for a very long
>time.
>
>(2) You are right to observe that in a "static" context, the endogenous
>money debate does tend to reduce to a debate over the slope of the LM
>curve. Horizontalists/Accommodationists believe that the LM is always
>flat. Structuralists believe that the LM is positively sloped, and that
>interest rates have a tendency to rise as output rises relative to
>normal levels.
>
>There are many reasons for this related to issues of financial
>intermediation and changing risk positions. The monetary authority may
>also contribute to the extent that it adopts a "leaning against the
>wind" policy stance.
>
>(3) Despite this, even a static conception of endogenous money yields
>insights and is of value. (i) It firmly introduces credit into the
>analysis, thereby leading to a focus on the macroeconomic consequences
>of debt. (ii) It discredits monetarist claims about the ability to
>control the money supply. The money supply is endogenous and can't be
>controlled. The monetary authority can only control the monetary base
>and the shortest of short term interest rates. Beyond that, all else is
>endogenous. (iii) This recognition of endogeneity then leads to a
>concern with optimal regulation - i.e. what are the best structures for
>managing it?
>
>(4) But the real pay-off to endogenous money comes when it is located
>in a "dynamic" context. I have explored this issue in a business cycle
>model [Journal of Economics/ Zeitschrift fur Nationalokonomie, 1997,
>vol.65]. The bottom line is endogenous money amplifies the business
>cycle.
>
>Unfortunately this work was still in progress when I wrote my book, and
>therefore did not get to include it.
>
>Best,
>
>Tom Palley
>
>
>--
>Michael Perelman
>Economics Department
>California State University
>Chico, CA 95929
>
>Tel. 530-898-5321
>E-Mail michael@xxxxxxxxxxxxxxxxx
>
>