Politics, Psychology, and the Neutrality Proposition

This paper provides a political-psychological explanation to the otherwise somewhat pessimistic accounts of the (structural) neutrality (invariance) proposition in the Rational Expectations (RE) money-output literature.We argue that: 1. The methodology for detecting unanticipated monetary policy, in its present form, might be flawed; 2. The political information, discussed in this paper, is of a “pure†expectational nature. This is due to the psychologically convenient limited information basis it has, and the complete lack of direct-stimuli effects, resulting from its existence in different explanatory models; 3. Existing unanticipated monetary policy should probably be partitioned into two unanticipated sources: “punishing expectations†, concerning an adjusting average metaphor, capable of apply ‘punishing expectations’ whenever economic conditions do not conform with its own egocentric welfare; and, real shocks to the system, unanticipated by both parts to the macroeconomic game, the public and policy-makers as well.