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A Pure Theory of Aggregate Price Determination
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Theoretical Economics Letters·Volume 01 (2011)·Pages 122–128·Published 3 November 2011·DOI10.4236/tel.2011.13026
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Abstract
This article considers aggregate price determination related to the neutrality of money. When the true cost of living can be defined as a function of prices in an overlapping generations (OLG) model, the marginal cost of a firm depends solely on the current and future prices. Thus, the sequence of equilibrium price becomes independent of the quantity of money. Hence, money becomes non-neutral. However, when people hold the extraneous belief that prices increases proportionately with money, this belief becomes self-fulfilling as long as the increment of money and true cost of living are low enough to guarantee full employment.
KeywordsMarginal CostTrue Cost of LivingNeutrality of MoneyCredibility of MoneyRational Extraneous Belief
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