[OPE-L:2041] Re: [MIKE WILLIAMS] electronic money

Steve Keen (s.keen@uws.edu.au)
Mon, 29 Apr 1996 18:48:51 -0700

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Duncan comments on my brief description of a multi-sector model:

>As you describe it, I don't see how your model addresses the problem of
>the valuation of the bank liabilities. Did you implicitly assume a
>constant price level? In fact, your model sounds as though it is an
>example of a credit system operating with a given value of bank
>liabilities in terms of commodities, where the bank reserves are
>absorbing the violations of budget constraints in disequilibrium.

No, the price level is a function of wage and commodity input costs and a
competitively set markup:

P[t+1] = (w[t]*e[t]+p[t]*A)(I+M[t+1])

where the markup is a sigmoid function between a minimum (above the interest
rate) and maximum and reflecting sectoral profit rates.

The point is that there is no presumed link between the value of bank
liabilities (which is the product of an accumulative process over time) and
the prices of commodities (which is the product of a non-accumulative
process over time). Inflation can occur (because of wage claims, mark-up
adjustments and inter-sectoral price effects), thus devaluing bank balances
in current terms. That said, I haven't been able to simulate the model yet
(have to write some software). But at the conceptual level, there is no link
between current commodity prices and current bank balances (except in the
ex-post sense that current prices can be used to deflate current bank
balances [if an index is developed, which is an issue in itself!]).

Steve Keen
Steve Keen
Senior Lecturer
Economics & Finance
University of Western Sydney
PO Box 555 Campbelltown NSW 2560
s.keen@uws.edu.au (046) 20-3016 Fax (046) 26-6683