Money, Interest, and Prices in Market Disequilibrium: A Comment

Abstract

In a recent article in journal, Herschel Grossman (1971) has extended Robert Clower's (1965) dual decision hypothesis to the case of multimarket disequilibrium in an attempt to provide a choice-theoretic analysis of the disequilibrium behavior of prices and interest. Two comments are in order regarding article. First, Grossman (1971, pp. 943, 960) claims too much when argues that his extension of Clower's dual decision hypothesis provides a choicetheoretic foundation for Don Patinkin's (1952) concept of spillover effects. In spite of the assertions this maximization calculus yields . (Grossman, 1971, p. 949) and he will maximize his objective function ... as follows . . ., (p. 950) made in specifying equations (5) and (6) of his model, these two equations are not behavioral relationships implied by a theory of choice. They simply define the spillover coefficients ac and pi in terms of effective and notional demands of his analysis. Second, Grossman's (p. 951) discussion of the effective excess demand for money in his model is inconsistent with the fundamental assumption upon which his model is based. Grossman is most explicit on assumption: model.. . assumes that the individual always demands ... the quantity which, given his perceived constraints in other markets, calculates to be optimal, although optimal quantity may exceed his perceived constraints in its own market (1971, p. 951). In the paragraph immediately following statement, however, statement is ignored: Finally, in type of model, as Leijonhufvud (1968, p. 88) has pointed out, the specification of the effective excess demand for money is ambiguous. The effective demands for bonds and commodities, by the budget constraint, imply an effective demand for money equal to (b' + y,). This implied effective demand can be equal to (b, + yi) ify = yi, or to (bi + y') if b b = , or to neither of these. However, in any case, implied effective demand in general will differ from both n' (Yi, b'), given by equation (6.1), and n' (y,, b), given by equation (6.2), and the latter two values will also, in general, [Journal of Political Economy, 1976, vol. 84, no. 4, pt. 1] (O 1976 by The University of Chicago. All rights reserved.