Money and Banking
Article Review #1
The article I read was The Interest-induced Wealth Effect and the Behavior of real and nominal interest rates: a comment. It was written by Laurence H. Meyer and Jess B. Yawitz in June of 1977 and is from The Journal of Finance, Volume Three. The article investigates the effects of the interest-induced wealth effect for the response of interest rates to monetary change and to changes in the expected inflation rate. It also looks at the effects of the interest-induced wealth effect for the existence of neutrality and the adjustment of interest rates to monetary change at full employment. Summary
The article investigates the studies of Burton Zwick, who investigated the effect of the interest-induced wealth effect on several different matters. The article began with a model that Zwick used to investigate the interest-induced wealth effect. This model was a large equation that included several different components, which included consumption, investment, nominal interest rates, the money supply, price level, real interest rates, expected rate of inflation, real income, monetary base, privately held stock of government bonds, and the discount value of all future income. There were a few problems detected in Zwick’s model, which included no relation between the money supply and high powered money, assumption that government bonds are of the fixed price-variable coupon variety, and inconsistency in the use of the nominal and real interest rates.
The first test was the response of interest rates to monetary change. The test measured the increase in the money supply when output is below full employment. Zwick concluded from this test that the interest-induced wealth effect reduces the equilibrium decline in the interest rate. “The greater the interest responsiveness of aggregate demand, the larger the change in real income and the smaller the change in the interest rate.” (942)
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