October, 2004

Money and the Real Economy: A Computational Search for Cantillon Effects

  • Richard Wagner

    Distinguished Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics
  • Stephen Daley

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Richard Cantillon's conjecture from 1735, that the particular path by which money is injected into an economy will exert real economic effects, is generally ignored in contemporary monetary analysis, perhaps because it would seem to imply some tradeoff between inflation and unemployment in a natural rate model. In this working paper, Drs. Daley and Wagner take a computational approach to economic modeling and develop a formulation whereby the path of monetary injection exerts real economic effects within the framework of a natural rate model. In this computational model, real effects operate through variations in the structural patern of economic activity, while leaving aggregate magnitudes approximately unchanged.