TITLE:
Ramsey’s Belief and the Plausibility of Keynesian Economics
AUTHORS:
Masayuki Otaki
KEYWORDS:
Ramsey’s Belief, Keynesian Economics, Monetarism, Plausibility, Equilibrium Selection
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.6,
December
10,
2015
ABSTRACT: Using Ramsey’s formulation of the probability theory, this study
considers the plausibility of alternative monetary theories—Keynesian and
monetarism, which is defined by the people’s confidence in such theories. It is
naturally assumed that the more complicated theory entails a dearer cost to
understand. Keynesian equilibrium is supported only through belief in the
stable intrinsic value of money. Conversely, monetarism requires that laypeople
have special and difficult knowledge so as to be confident about its assertion;
namely, the linear relationship between nominal money supply and price; the
actual value of Marshallian k and the
volume of nominal money supply. As such, the Keynesian belief is far more
prevalent in the actual economy.