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Inside money and monetary neutrality

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Author Info

  • Hartley, Peter R.
  • Walsh, Carl E.

Abstract

This paper examines the interaction between the financial and real sectors of the economy within the framework of a stochastic, rational expectation model that distinguishes between inside and outside money. The model also can be used to study the impact of variations in the degree of intermediation, measured by the elasticity of bank deposit supply. In contrast to earlier work which emphasized confusion between monetary and real shocks, we focus on the role played by confusion between inside and outside money and temporary and permanent base money disturbances. Financial sector disturbances, as well as temporary shocks tothe monetary base, are shown to have real effects even when private agents have complete information. When contemporaneous information on economic disturbances is incomplete, permanent shocks to the monetary base also have real effects. If our model is correct, it is invalid to reject equilibrium models of the business cycle on the grounds that anticipated money affects output. We argue that this result is robust in the sense that many "reasonable" models which incorporate inside money would yield a non-neutrality of portfolio and temporary base money supply shocks.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 13 (1991)
Issue (Month): 3 ()
Pages: 395-416

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Handle: RePEc:eee:jmacro:v:13:y:1991:i:3:p:395-416

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Web page: http://www.elsevier.com/locate/inca/622617

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References

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  1. Barro, Robert J. & Hercowitz, Zvi, 1980. "Money stock revisions and unanticipated money growth," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 257-267, April.
  2. Stanley Fischer, 1983. "A Framework for Monetary and Banking Analysis," NBER Working Papers 0936, National Bureau of Economic Research, Inc.
  3. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  4. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  5. King, Robert G & Plosser, Charles I, 1984. "Money, Credit, and Prices in a Real Business Cycle," American Economic Review, American Economic Association, vol. 74(3), pages 363-80, June.
  6. Waldo, Douglas G., 1982. "Rational expectations and the role of countercyclical monetary policy," Journal of Monetary Economics, Elsevier, vol. 10(1), pages 101-109, July.
  7. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  8. Brunner, Karl & Cukierman, Alex & Meltzer, Allan H., 1980. "Stagflation, persistent unemployment and the permanence of economic shocks," Journal of Monetary Economics, Elsevier, vol. 6(4), pages 467-492, October.
  9. Walsh, Carl E, 1983. " Taxation of Interest Income, Deregulation and the Banking Industry," Journal of Finance, American Finance Association, vol. 38(5), pages 1529-42, December.
  10. James Tobin & William C. Brainard, 1962. "Financial Intermediaries and the Effectiveness of Monetary Controls," Cowles Foundation Discussion Papers 63R, Cowles Foundation for Research in Economics, Yale University.
  11. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  12. John F. Boschen & Herschel I. Grossman, 1983. "Tests of Equilibrium Macroeconomics Using Contemporaneous Monetary Data," NBER Working Papers 0558, National Bureau of Economic Research, Inc.
  13. V. Vance Roley & Carl E. Walsh, 1986. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," NBER Working Papers 1181, National Bureau of Economic Research, Inc.
  14. Alberro, Jose, 1981. "The Lucas hypothesis on the Phillips Curve : Further international evidence," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 239-250.
  15. Roley, V Vance & Walsh, Carl E, 1984. "Unanticipated Money and Interest Rates," American Economic Review, American Economic Association, vol. 74(2), pages 49-54, May.
  16. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
  17. King, Robert G. & Trehan, Bharat, 1984. "Money : Endogeneity and neutrality," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 385-393, November.
  18. Bryant, John & Wallace, Neil, 1984. "A Price Discrimination Analysis of Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 279-88, April.
  19. King, Robert G., 1981. "Monetary information and monetary neutrality," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 195-206.
  20. Fischer, Stanley, 1983. "A Framework for Monetary and Banking Analysis," Economic Journal, Royal Economic Society, vol. 93(369a), pages 1-16, Supplemen.
  21. Romer, David, 1985. "Financial intermediation, reserve requirements, and inside money: A general equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 175-194, September.
  22. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  23. Neil Wallace, 1983. "A legal restrictions theory of the demand for "money" and the role of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  24. Kormendi, Roger C & Meguire, Philip G, 1984. "Cross-Regime Evidence of Macroeconomic Rationality," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 875-908, October.
  25. Rush, Mark, 1985. "Unexpected monetary disturbances during the gold standard era," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 309-321, May.
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Citations

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Cited by:
  1. Demid Golikov, 2005. "Financial Intermediary In Monetary Economics: An Excerpt," Macroeconomics 0510018, EconWPA.
  2. Luca Guerrieri & Matteo Iacoviello & Raoul Minetti, 2012. "Banks, Sovereign Debt and the International Transmission of Business Cycles," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 181-213 National Bureau of Economic Research, Inc.
  3. Peter Stemp, 1993. "Optimal money supply rules under asymmetric objective criteria," Journal of Economics, Springer, vol. 57(3), pages 215-232, October.
  4. Stracca, Livio, 2007. "Should we take inside money seriously?," Working Paper Series 0841, European Central Bank.
  5. Carl E. Walsh & Peter R. Hartley, 1988. "Financial intermediation, monetary policy, and equilibrium business cycles," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 19-28.

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