Money non-neutrality in a Rational Belief Equilibrium with financial assets
AbstractIn Rational Beliefs Equilibria money is generically non-neutral. Given the expectational perspective proposed by the Theory of Rational Belief Equilibrium, we show that one of the most important factors in the emergence of money non-neutrality is played by Endogenous Uncertainty. This, in contrast to the Rational Expectations results of money neutrality and policy ineffectiveness, leads to a scenario in which monetary policy has an impact on the real economy and price volatility. The heterogeneity of beliefs together with the distribution and intensity of agents' states of optimism/pessimism can amplify the real effect of monetary policy and/or generate endogenous fluctuations in the economy which are not explained by any exogenous shock. We claim that money non-neutrality is mostly an expectations driven phenomenon. Indeed, additional assumptions of asymmetry of information and/or unanticipated monetary policy are not needed to explain the real effect of monetary policy as it is customary in the New Classical Theory.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 18 (2001)
Issue (Month): 1 ()
Note: Received: May 30, 2000; revised version: December 28, 2000
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Find related papers by JEL classification:
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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