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On model ambiguity and money neutrality

  • Lioui, Abraham
  • Poncet, Patrice

We solve for the equilibrium of a stochastic neo-classical continuous time model without and with money under model ambiguity. We show that: (i) the correction for ambiguity stemming from the money supply is nil at equilibrium; (ii) money is neutral with respect to the stock market equilibrium (the equity risk premium); (iii) money is not neutral with respect to consumption and capital accumulation, and its effect may be quantitatively substantial; (iv) the preference for model robustness affects all the real economic variables as well as the expected inflation rate and the nominal interest rate.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 4 ()
Pages: 1020-1033

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:4:p:1020-1033
DOI: 10.1016/j.jmacro.2012.08.003
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