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

Listed author(s):
  • Maurizio Motolese


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

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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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) 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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