Share This Article:

A Pure Theory of Aggregate Price Determination

Abstract Full-Text HTML Download Download as PDF (Size:97KB) PP. 122-128
DOI: 10.4236/tel.2011.13026    4,676 Downloads   8,536 Views   Citations
Author(s)    Leave a comment


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.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

M. Otaki, "A Pure Theory of Aggregate Price Determination," Theoretical Economics Letters, Vol. 1 No. 3, 2011, pp. 122-128. doi: 10.4236/tel.2011.13026.


[1] J. M. Keynes, “The General Theory of Employment, Interest and Money,” Macmillan, London, 1936.
[2] M. Otaki, “The Dynamically Extended Keynesian-Cross and the Welfare-Improving Fiscal Policy,” Economics Letters, Vol. 96, No. 1, 2007, pp. 23-27. doi:10.1016/j.econlet.2006.12.005
[3] M. Otaki, “A Welfare Economics Foundation for the Full- Employment Policy,” Economics Letters, Vol. 102, No. 1, 2009, pp. 1-3. doi:10.1016/j.econlet.2008.08.003
[4] R. E. Lucas Jr., “Expectations and the Neutrality of Mo- ney,” Journal of Economic Theory, Vol. 4, No. 2, 1972, pp. 103-124.
[5] G. Calvo, “Staggered Prices in a Utility Maximizing Fra- mework,” Journal of Monetary Economics, Vol. 12, No. 3, 1983, pp. 383-398. doi:10.1016/0304-3932(83)90060-0
[6] N. G. Mankiw and R. Reis, “Sticky Information vs. Sti- cky Prices: A Proposal to Replace the New Keynesian Phillips Curve,” Quarterly Journal of Economics, Vol. 100, No. 2, 2002, pp. 529-539. doi:10.2307/1885395
[7] M. Woodford, “Interest and Prices: Foundations of a Theory of Monetary Policy,” Princeton University Press, Princeton, 2003.
[8] J. Galì, “Monetary Policy, Inflation, and the Business Cy- cle: An Introduction to the New Keynesian Framework,” Princeton University Press, Princeton, 2008.
[9] R. W. Shephard, “Cost and Production Functions,” 2nd Edition, Springer-Verlag, Berlin, 1981.
[10] W. E. Diewert, “Cost of Living Indexes and Exact Index Numbers,” Discussion Paper 09-06, Department of Eco- nomics, University of British Columbia, Vancouver, 2009.
[11] K. Fukao and M. Otaki, “Accumulation of Human Capi- tal and the Business Cycle,” Journal of Political Econ- omy, Vol. 101, No. 1, 1993, pp. 72-99.
[12] R. E. A. Farmer, “Sticky Prices,” Economic Journal, Vol. 101, No. 409, 1991, pp. 1369-1379. doi:10.2307/2234890
[13] R. E. A. Farmer, “Nominal Price Stickiness as a Rational Expectations Equilibrium,” Journal of Economic Dynamics and Control, Vol. 16, No. 2, 1992, pp. 317-337. doi:10.1016/0165-1889(92)90036-E
[14] R. F. Kahn, “The Relation of Home Investment to Unemployment,” Economic Journal, Vol. 41, No. 162, 1931, pp. 173-198. doi:10.2307/2223697
[15] M. Friedman and A. J. Schwartz, “A Monetary History of the United States1867-1960,” Princeton University Press, Princeton, 1963.
[16] P. Cagan, “The Monetary Dynamics of Hyperinflation,” In: M. Friedman, Ed., Studies in the Quantity Theory of Money, University of Chicago Press, Chicago, 1953, pp. 25-117.
[17] K. Otani, “Rational Expectations and Non-Nuetrality of Money,” Weltwirschaftliches, Vol. 121, 1985, pp. 207- 216.

comments powered by Disqus

Copyright © 2018 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.