<p>The equations you have are equilibrium conditions, while derivation (of course) starts with the demand equation and sets demand equal to supply. Then:</p>

<ul>
<li><p>$\varphi$ ($0&lt;\varphi&lt;1$) is the income elasticity of money demand - the responsiveness of demand with respect to income</p></li>
<li><p>$-\lambda$ ($-\lambda &lt;0$) is the interest rate semi-elasticity of money demand - the responsiveness of demand to the change in interest rates.</p></li>
</ul>

<p>Semi-elasticity means that we care how much Y changes in percentages when we increase $X$ by one (increase by one, not by one percentage point).</p>

CC BY-SA 3.0
2018-04-15T11:04:15.157Z
2018-04-15T20:05:14.143Z
2018-04-15T20:05:14.143Z
NFilip
<p>To my understanding, $\phi$ and $\lambda$ are simply positive parameters in the Dornbusch model used to represent the linear (in logarithms) equilibrium condition in the money market.</p>

<p>$$
m - p = \phi y - \lambda i
$$</p>

<p>is also known as the LM curve, in logarithms.</p>

CC BY-SA 3.0
2018-01-15T02:36:30.077Z
2018-01-15T02:36:30.077Z
Kenneth Rios
<p><a href="https://i.sstatic.net/8Hw97.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/8Hw97.jpg" alt="enter image description here"></a></p>

<p>Stupid question: What do the phi and lambda from the equations above represent?</p>

<exchange-rates>
Dornbusch Sticky Price (Overshooting) model
Ana
# Dornbusch Sticky Price (Overshooting) model

(Asked by: username_0 on 2018-01-14)

[![enter image description here](https://i.sstatic.net/8Hw97.jpg)](https://i.sstatic.net/8Hw97.jpg)

Stupid question: What do the phi and lambda from the equations above represent?

**Tags:** exchange-rates


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## 2 answers

### Answer by username_1 on 2018-04-15. Score: 1

The equations you have are equilibrium conditions, while derivation (of course) starts with the demand equation and sets demand equal to supply. Then:

* $\varphi$ ($0<\varphi<1$) is the income elasticity of money demand - the responsiveness of demand with respect to income
* $-\lambda$ ($-\lambda <0$) is the interest rate semi-elasticity of money demand - the responsiveness of demand to the change in interest rates.

Semi-elasticity means that we care how much Y changes in percentages when we increase $X$ by one (increase by one, not by one percentage point).


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### Answer by username_2 on 2018-01-15. Score: 0

To my understanding, $\phi$ and $\lambda$ are simply positive parameters in the Dornbusch model used to represent the linear (in logarithms) equilibrium condition in the money market.

$$
m - p = \phi y - \lambda i
$$

is also known as the LM curve, in logarithms.


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