Real Balance Effects, Timing, and Equilibrium Determination



  • I am especially thankful to Harald Uhlig. I also thank Wouter Den Haan, Jordi Galí, Andreas Schabert, and Mark Weder for helpful discussions. This research was supported by the Deutsche Forschungsgemeinschaft through the SFB 649 “Economic Risk.”

Christian A. Stoltenberg is Assistant Professor, Department of Economics, Universiteit van Amsterdam, Valckenierstraat 65, 1018 XE Amsterdam, The Netherlands (E-mail:


By assuming that money balances at the beginning instead of at the end of the period provide transaction services, standard results on nominal and real determinacy in monetary models are overturned. The key is that predetermined real money balances can be a state variable. Whereas the determination of the absolute price level typically depends on fiscal policy under an exogenous interest setting, nominal determinacy is now achieved even when fiscal policy is Ricardian. Also, in contrast to the Taylor principle, the interest rate policy should respond passively to changes in inflation, thus ensuring nonoscillatory and locally stable equilibrium sequences.