Real cash effect
In economics, the real cash effect admits for the first time an influence of monetary quantities on the real economy and abolishes the dogma of the neutrality of money and the dichotomy (Greek: dichotomy ) between the real and monetary sectors of the economy , which was valid until then . However, falling prices are supposed to stimulate the demand for goods via this real cash effect and rising prices dampen the demand for goods, which exactly contradicts the positions represented by John Maynard Keynes .
Basics
Before Keynes, economics had basically denied any monetary influence on the real economy. The amount of money in circulation should only influence the price level, so that the real cash should have been adjusted to the desired cash position based on the price level alone. This dogma had become untenable due to the global economic crisis and the influence of Keynes, so that the previous representatives of the orthodox doctrine such as Arthur Cecil Pigou had to admit a monetary influence on the real economy, but in connection with the neoclassical synthesis by the IS-LM- model of John R. Hicks , a theory of Keynes completely opposite monetary effect on the economy constructed.
While Keynes had always argued against a deflationary policy and demanded reflation of the price level in order to overcome the global economic crisis, the real cash effect asserted that the demand for goods would rise when prices were falling and falling when prices rose. The real cash effect is based solely on the increase in the value of the real cash in the event of deflation and its loss in value in the event of inflation and leaves out all other economic factors affected by price changes, such as the real interest rate and the real debt burden, although this real cash effect is negligible in its magnitude.
Real cash effect with falling price level
Real financial assets can increase through a fall in the price level for a given nominal money supply. As a result, the transaction balance held by economic entities becomes larger in real terms than would be necessary for the planned expenditure. If economic agents notice the increase in their real money stocks, they will expand their demand for goods . In the IS-LM model, the IS curve shifts to the right due to the lower propensity to save and the LM curve to the right due to the real increase in money supply, production and income rise.
Real cash effect with rising price level
Real financial assets decrease due to a rise in the price level and real cash balances fall below the desired cash level. The economic agents restrict their expenditure in order to achieve their desired real cash balance again. In the IS-LM model, the IS curve shifts to the left because of the higher propensity to save and the LM curve because of the lower real money supply, with output and income falling.
Applications
The changes in the price level resulting from the real cash effect are a central component of various economic models. The argumentation of the following application examples is based, among other things, on the price level variations described by the real cash effect .
Pigou effect
The Pigou effect generally resembles the real cash effect, but also emphasizes the wealth effect for the holders of government bonds, for whom a falling price level creates the feeling of being wealthier. Therefore the propensity to save falls and their consumption expenditure increases; thus the rising demand for goods stimulates the economy in the economy.
- Effect chain of the Pigou effect
Price level falls → deflation → purchasing power of money and government bonds increases → demand for goods increases
Keynes Effect
The Keynes effect (also: Keynes - interest rate effect) is an indirect real cash effect. It describes an effect on the demand for goods that has an indirect effect on the investment via the market interest rate on the securities market . As a result of the excessive cash holdings (transaction and speculative cash registers) when prices fall, the demand for securities increases, so interest rates decrease and investments increase. In the IS-LM model, the IS curve shifts to the right, income and employment increase. The naming of the effect after Keynes is based only on a one-time and still very limited statement in the same paragraph that a reduction in wages and prices can lead to falling nominal interest rates and favor investments. In general, Keynes believed that deflation had a negative effect on the economy, investment and employment.
- The Keynes Effect chain of effects
Price level decreases → propensity to save increases → market interest rate decreases → investment demand increases
or.
Price level rises → propensity to save falls → market interest rate rises → investment demand falls
Real treasury or patinkin effect
Don Patinkin's approach is known as the augmented real cash effect or real cash holding effect . The real cash management is adjusted to the desired cash management after a price change due to increasing or decreasing expenses. Falling prices therefore lead to increased demand for consumer goods and securities as well as increased investments due to increased real assets. Don Patinkin considers cash keeping under the benefit concept and a balance is sought between the marginal benefit of cash keeping with the marginal benefit of additional consumption or investments.
Criticism of the model
The real cash effect is sometimes viewed critically, since every financial asset of the monetary aggregates M1, M2 etc. is equivalently associated with a debt level. Accordingly, the real cash effect increases not only assets but also liabilities , so that the negative and positive effects on consumption are balanced out. This calls into question the empirical significance of the real cash effect. The base money supply, on the other hand, is not matched by a loan.
See also
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Individual evidence
- ^ John Maynard Keynes: The Economic Consequences of Mr. Churchill. In: Essays in Persuasion. WW Norton & Company, 1991, p. 259
- ^ Paul Krugman : Real balance effects (wonkish) . In: The New York Times . December 4, 2008
- ↑ Keynes: General Theory, Duncker & Humblot, Berlin 2006, p. 222
- ↑ Cf. Klinger, Sabine (2005), Flow and Stock Quantities in Economics, Hamburg: Verlag Dr. Kovač, page 99
- ↑ See ibid.
literature
- Berlemann, Michael (2005), Macroeconomics, Berlin: Springer
- Felderer, Bernhardt and Homburg, Stefan (2005), Macroeconomics and New Macroeconomics, 9th Edition, Berlin: Springer
- Klinger, Sabine (2005), Current and Stock Quantities in Economics, Hamburg: Verlag Dr. Kovač
- Mankiw, Nicholas Gregory (2001), Grundzüge der Volkswirtschaftslehre, 2nd edition, Stuttgart: Schäffer-Poeschel Verlag
- Peschner, Jörg (1998), Macroeconomic wealth effects taking physical capital into account - a theoretical and empirical analysis, Berlin: Logos Verlag