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Monetary policy arithmetic: reconciling theory with evidence

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  • Maxim Nikitin
  • Steven Russell

Abstract

Empirical 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 Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 39 (2006)
Issue (Month): 1 (February)
Pages: 348-374

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Handle: RePEc:cje:issued:v:39:y:2006:i:1:p:348-374

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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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Cited by:
  1. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal Monetary Policy and Economic Growth," Staff General Research Papers 12413, Iowa State University, Department of Economics.
  2. 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.
  3. 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.

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