Monetary Policies and Full Employment

By William Fellner | Go to book overview
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CHAPTER VI
Alternative Monetary Policies

EXPANSIONARY MONETARY POLICIES AND THE ELASTICITY OF HOARDNG

THE EFFECTIVENESS of certain types of monetary policy in maintaining the level of employment in the face of downward shifted expectation depends greatly on the elasticity of liquidity provisions and on that of private investment with respect to rates on money loans. The present section summarizes the relationship between expansionary monetary policies, on the one hand, and elasticity considerations, on the other.

1) The sale of government securities to the public and the use of the proceeds of the borrowing operations for public expenditures can become reasonably successful only if the L functions expressed in figures 20 and 22 are downward sloping and if they possess considerable (negative) elasticity. The sale of government securities to the public tends to raise interest rates beyond the level at which they otherwise would be. If the L function is upward sloping--which, as was pointed out in the preceding chapter, is a possibility:1--the public increases its idle balances. Consequently, the policy under consideration has contractionary effects whenever the movement occurs along a reasonably stable, upward sloping L function. Effectiveness of the policy requires that idle balances rather than active money be borrowed and spent by the government and this condition is identical with that of downward sloping and considerably elastic L functions. In the limiting case of perfectly elastic L functions it could be maintained that only hoards are borrowed and spent by the government. In this limiting case interest rates do not rise at all, so that private investment and the amount of working balances do not decline. The entire government expenditure constitutes a

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1
Cf. above, chap. v, p. 168.

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