A Monetary Theory of Nominal Income

Abstract

This paper constructs a simple model for analyzing short-term economic fluctuations that bypasses the problem of the division of a change in nominal income between prices and output. The model combines one element from Irving Fisher (the difference between the nominal and the real interest rate) and one element from John Maynard Keynes (the determination of market interest rates by speculators with firmly held anticipations) with two empirical assumptions (a unit real income elasticity of demand for money and an exogenous excess of the real interest rate over the real secular rate of growth). The result is a model connecting current nominal income with current and prior nominal quantities of money.