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Money non-neutrality in a Rational Belief Equilibrium with financial assets

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  • Maurizio Motolese

    ()
    (Istituto di Politica Economica, UniversitÁ Cattolica di Milano, via Necchi 5, 20123 Milano, ITALY)

Abstract

In 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 Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 18 (2001)
Issue (Month): 1 ()
Pages: 97-126

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Handle: RePEc:spr:joecth:v:18:y:2001:i:1:p:97-126

Note: Received: May 30, 2000; revised version: December 28, 2000
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Related research

Keywords: Money non-neutrality; Monetary policy; Rational expectations; Rational beliefs; Rational Belief Equilibrium; Endogenous uncertainty; States of belief.;

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Cited by:
  1. Kurz, Mordecai & Piccillo, Giulia & Wu, Howei, 2013. "Modeling diverse expectations in an aggregated New Keynesian Model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1403-1433.
  2. William Branch & Bruce McGough, 2011. "Business cycle amplification with heterogeneous expectations," Economic Theory, Springer, vol. 47(2), pages 395-421, June.
  3. Mordecai Kurz & Maurizio Motolese, 2007. "Diverse Beliefs and Time Variability of Risk Premia," Discussion Papers 06-044, Stanford Institute for Economic Policy Research.
  4. Mordecai Kurz, 2007. "Rational Diverse Beliefs and Economic Volatility," Discussion Papers 06-045, Stanford Institute for Economic Policy Research.
  5. Mordecai Kurz, 2011. "Symposium: on the role of market belief in economic dynamics, an introduction," Economic Theory, Springer, vol. 47(2), pages 189-204, June.
  6. Kurz, Mordecai & Motolese, Maurizio, 2006. "Risk Premia, diverse belief and beauty contests," MPRA Paper 247, University Library of Munich, Germany.
  7. Kurz, Mordecai & Jin, Hehui & Motolese, Maurizio, 2003. "The role of expectations in economic fluctuations and the efficacy of monetary policy," CFS Working Paper Series 2003/42, Center for Financial Studies (CFS).
  8. Kurz, Mordecai, 2006. "Beauty contests under private information and diverse beliefs: how different?," MPRA Paper 233, University Library of Munich, Germany, revised Apr 2006.
  9. Kurz, Mordecai, 2008. "Beauty contests under private information and diverse beliefs: How different?," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 762-784, July.

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