The Special Theory of Employment, Exchange Rate, and Money With the Focus on Inflation and Technological Progress

We introduce the quantity theory of money into the Harrod–Balassa–Samuelson effect model. Our policy rule specifies the impossibility of perfect exchange rate stability with monetary policy, as Friedman (1953) suggests. We discover the importance of inflation to technological progress, while the rent-seeking behaviors in firms foster their productivity slowdowns and disinflations. Their forward-looking behaviors, like animal spirit (Keynes, 1936/1997), control outputs under the marginal productivity hypothesis with the Cobb-Douglus production function. Baumol’s (1959) sales revenue maximization hypothesis explains full employment and deflations but breaks the marginal productivity hypothesis. We briefly argue the downward stickiness of nominal wages (incomes).