The Mundell–Tobin effect suggests that
nominal interest rates would rise less than one-for-one with
inflation because in response to inflation the public would hold less in
money balances and more in other
assets
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...
, which would drive interest rates down. In other words, an increase in the exogenous growth rate of money increases the nominal interest rate and
velocity of money, but decreases the
real interest rate. The importance of the Mundell–Tobin effect is in that it appears as a deviation from the
classical dichotomy In macroeconomics, the classical dichotomy is the idea, attributed to classical and pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an economy exhibits the classical dichotomy if real variables s ...
.
Robert Mundell
Robert Alexander Mundell (October 24, 1932 – April 4, 2021) was a Canadian economist. He was a professor of economics at Columbia University and the Chinese University of Hong Kong.
He received the Nobel Memorial Prize in Economic Sciences ...
was the first to show expected inflation has real economic effects. A similar argument was introduced by economist
James Tobin
James Tobin (March 5, 1918 – March 11, 2002) was an American economist who served on the Council of Economic Advisers and consulted with the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He de ...
.
See also
*
Solow–Swan model
The Solow–Swan model or exogenous growth model is an economic model of long-run economic growth. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largel ...
References
Inflation
{{economics-stub