Monetary policy arithmetic: reconciling theory with evidence
AbstractEmpirical evidence indicates that, in countries with low inflation rates, a permanent decrease in inflation rate either has no impact on capital stock and output (superneutrality) or causes them to fall moderately. Existing budget arithmetic models of monetary policy cannot deliver superneutrality. In this paper, we conduct a budget arithmetic analysis of monetary policy using a money demand specification - money in the utility function - that is new to this literature. We find that one simple assumption about utility from money delivers superneutrality, while a more general assumption delivers departures from superneutrality in the direction consistent with the evidence.
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 39 (2006)
Issue (Month): 1 (February)
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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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Find related papers by JEL classification:
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
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- von Thadden, Leopold, 2012. "Monetary policy rules in an OLG model with non-superneutral money," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 147-166.
- Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009.
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- Reed, Robert R. & Ghossoub, Edgar A., 2012. "The effects of monetary policy at different stages of economic development," Economics Letters, Elsevier, vol. 117(1), pages 138-141.
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