Money and Income: The View from the Government Budget Restraint

IT IS WIDELY HELD that an increase in the money supply, resulting say from an open-market purchase, causes income to rise. The purpose of this paper is to question this apparently incontrovertible result. In particular, it is argued that in the widely analyzed case of an open-market purchase generating a short-run increase in money income, the long-run effect of the increase in the money stock is a reduction in income. The basic relation for the analysis is the government budget restraint.