- Mundell-Tobin effect
The Mundell-Tobin effect suggests that
nominal interest rates would rise less than one-for-one with inflationbecause in response to inflation the public would hold less in moneybalances and more in other assets, 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. Robert Mundellwas the first to show expected inflation has real economic effects. A similar argument was introduced by economist James Tobin.
#Mundell, R. (1963) Inflation and Real Interest. "Journal of Political Economy 71"
#Tobin, J (1965) Money and Economic Growth. "Econometrica 33"
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