THE REAL BALANCE EFFECT AND STABILITY ANALYSIS IN CLASSICAL MONETARY THEORY

The paper investigates the use of the real balance effect mechanism by Dennis Robertson in Money (1922), Banking Policy and the Price Level (1926) and subsequently in his Lectures On Economic Principles (1957‐59). The Paper draws on the correspondence between Robertson and Don Patinking during the period 1951‐56. It was Patinkin's opinion that Robertson never used the real balance effect as a mechanism to bring the disequilibriated monetary sector back to a new equilibrium; this paper shows that these conclusions are crucially dependent on the interpretation of what constitutes ‘stability analysis’.