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A strategic analysis of “Expectations and the neutrality of money”

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  • Gent Bajraj
  • Neil Wallace

Abstract

"Expectations..." is the first counter-example to the view that a positive correlation between real output and the growth rate of the stock of money is exploitable. The equilibrium concept is rational expectations equilibrium. Here, two alternative strategic formulations -two versions of the marketgame model- are applied. In one, the young make non-contingent offers of real saving; in the other, they make contingent offers, where the contingency is the realization of the two shocks in the model. Under the informational assumption that the young know nothing about current realizations, neither strategic formulation converges under replication to an equilibrium that exhibits the above positive correlation.

Suggested Citation

  • Gent Bajraj & Neil Wallace, 2021. "A strategic analysis of “Expectations and the neutrality of money”," Working Papers Central Bank of Chile 901, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:901
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_901.pdf
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    References listed on IDEAS

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    1. Michihiro Kandori, 1992. "Repeated Games Played by Overlapping Generations of Players," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 81-92.
    2. Araujo, Luis & Shevchenko, Andrei, 2006. "Price dispersion, information and learning," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1197-1223, September.
    3. Dubey, Pradeep & Geanakoplos, John & Shubik, Martin, 1987. "The revelation of information in strategic market games : A critique of rational expectations equilibrium," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 105-137, April.
    4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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