An Elementary Monetarist Model of Simultaneous Fluctuations in Prices and Output

Abstract

Recent economic history has combined unusually high levels of unemployment with an unusually high rate of inflation. Those whose views on the generation of inflation may be characterised as “monetarist” have not found it necessary to abandon their views in the light of recent experience, for there is abundant evidence of long-run correlation between the time paths of the money supply and the level of money income. Nevertheless, the behaviour of the unemployment and inflation rates has highlighted the lack in the monetarist’s tool kit (and every other economist’s tool kit for that matter) of a formal model of the macroeconomic system which accounts for the way in which changes in money income are divided over time between changes in real income and changes in prices.