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.
First, among them is the equivalence of the "natural" rate of interest and the money rate of interest. The second condition of monetary equilibrium is equilibrium in the capital market. That is the equivalence between the supply of and demand for savings. Finally, the third condition of monetary-equilibrium concerns equilibrium in the commodity market defined as stable price level.
Myrdal however has a different stand all together on this. He does admit the possibility that an increase in savings might decrease the money interest rate thereby increasing the investment but does think this to be a very strong factor and therefore misses the equilibrating function of the interest rates in the capital market.
Two important points regarding monetary-equilibrium needs to be stated. Firstly, there is no necessary relationship between monetary and general equilibrium. It is totally compatible with disequilibria in various markets for goods and services. Secondly, monetary- equilibrium can be seen as a desirable policy goal by monetary regimes.
Read more about this topic: Monetary-disequilibrium Theory
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