Gunnar Myrdal's Monetary Equilibrium Theory: A Summarized Version

by Philip Pilkington

Jan has brought my attention to the following paper which lays out a good outline of Gunnar Myrdal’s Monetary Equilibrium. Since many are unfamiliar with Myrdal’s theories in the English-speaking world I will lay out what I think to be some of the most salient points here.

disequilibrium.02

Tobon lays out a nice clear series of conditions that must be met for monetary equilibrium to occur in Wicksell’s theory:

Monetary equilibrium conditions

Or, in English:

Wicksell’s monetary equilibrium is defined by three fundamental conditions: 1) the equality between the money interest rate im and the natural interest rate in, 2) the equality between investment I and savings S , and 3) the stability of the general level of prices, that is to say its variation rate in time, P , is equal to zero. (Pp4)

Those familiar with theories such as the New Keynesian Taylor Rule or the Austrian Business Cycle Theory will instantly recognize that the conditions set out at the base of Wicksellian theory also apply to these theories.

In contrast to the three conditions needed for Wicksell’s equilibrium, Myrdal lays out three different conditions - which, due to their probably being less familiar to the reader, will have to be explained in more detail. These conditions are as follows:

MYRDAL Monetary equilibrium conditions

The first condition is that the price of new capital goods, c2, should be equal to the price of production of these goods, r2. Or, put somewhat differently: that entrepreneurs should not be able to make additional profits by taking advantage of the spread between the price of new capital goods and the price of production of these goods. This, then, is an equilibrium or ‘normal’ profit condition and leads to a constancy of the net investment flow.

The second condition is where all the action lies, as it were. It states that gross real investment, R2, must equal free capital disposal, W. We must understand free capital disposal to mean not simply savings but also expectations regarding the future. Myrdal breaks down W as W = S + D where the D includes expectations about the net change in capital values. Or, as Myrdal put it this value is:

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