De patinkin-puzzle

Abstract

This essay contains a review of the so-called Patinkin controversy which arose about the possible inconsistency of the classical dichotomy model. It can be established that this model is logically consistent and economically reasonable if and only if one is prepared to assume continually existing individual monetary equilibria. A real dichotomization of the economy into two independent sectors, which determine relative prices and the general price level, is therefore out of the question. As opposed to Patinkin and Modigliani the same can be said for a model with no distribution effects and only inside money. Although the real balance effect is not always operative as an adjustment mechanism, it hardly can be suspended in a static long-run model with that limited quantity of uncertainty which is needed for a minimal analysis of an economy with money as a medium of exchange.