Monetary equilibrium

Monetary disequilibrium theory is a product of the Monetarist school and is mainly represented in the works of Leland Yeager and Austrian macroeconomics. The basic concept of monetary equilibrium (disequilibrium) was, however, defined in terms of an individual's demand for cash balance by Mises (1912) in his Theory of Money and Credit.

Monetary disequilibrium is one of three theories of macroeconomic fluctuations which accord an important role to money, the others being the Austrian theory of the business cycle and one based on rational expectations.

Leland Yeager's (1968) understanding of the monetary disequilibrium theory begins with fundamental properties of money.

Money is the generally accepted medium of exchange is one among the most important properties. The other two properties that Yeager emphasized are that the demand for money is a demand to hold real money balances and that the acquisition of money has a "routinenss" to it that distinguishes it from other goods. He actually made effective use of the cash balance approach to the demand for money. When we combine these two properties we get a distinction between actual and desired money balances. The differences between individuals' actual and desired holdings of money are the proximal causes of them affecting the level of spending in the macroeconomy. These differences between actual and desired money balances appear economy-wide when we have inflation or deflation.

It presents an alternative to the real business cycle model and the quantity theory of money considered only a long-run theory of the price level. While it is widely agreed in economics that monetary policy can influence real activity in the economy, real business cycle theory ignores these effects. The theory also addresses the effects of monetary policy on real sectors of the economy, that is, on the quantity and composition of output.

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