The Rose-Wicksell model: Inside money,stability, and stabilization policies

This paper examines a Rose-Wicksell, as opposed to a Stein-Keynes-Wicksell, model of Monetary Dynamics. Here, all money is of the “pure credit,” or “inside,” variety. Suppliers of money (banks) do not suffer from money illusion just as demanders do not; their decision to supply real balances is, likewise, based on profit maximization. The stability properties of the model are derived both in the short and the growth runs. It is shown that if interest is paid on demand deposits and if this rate is manipulated by the Central Bank, according to the rate of inflation, then all sources of instability can be eliminated. Moreover, stabilization of the short run guarantees stabilization of the growth model.