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Anticipated Money, Inflation Uncertainty and Real Economic Activity

  • Makin, John H

This paper critically examines a number of maintained hypotheses that are necessarily being tested along with the basic notion derived from the rational expectations (RE) formulation of Lucas (1972) (19 73) that "only unanticipated money matters." The trend stationary representation of secular real output of Lucas and others is replaced by a difference stationary representation found by Nelson and Plosser (1980) to be consistent with U. S. historical data. The impact of inflation uncertainty on real activity is considered. Attention is paid to possible mis-measurement of agents' ex ante -- anticipated money growth. It is found that three alternative measures of anticipated money growth produce a stable impact on growth of output and employment. Contemporaneous and lagged values of unanticipated money growth have no significant additional explanatory power in the presence of any one of the three measures of anticipated money growth. Beyond this, it is impossible to reject the hypothesis that the initial positive real impact of anticipated money is not temporary. Inflation uncertainty is found to act as a significant depressant of real economic activity in the presence of all tested combinations of anticipated and unanticipated money growth.

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Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 64 (1982)
Issue (Month): 1 (February)
Pages: 126-34

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Handle: RePEc:tpr:restat:v:64:y:1982:i:1:p:126-34
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  1. Thomas J. Sargent & Neil Wallace, 1974. "Rational expectations and the theory of economic policy," Working Papers 29, Federal Reserve Bank of Minneapolis.
  2. Azariadis, Costas, 1981. "A Reexamination of Natural Rate Theory," American Economic Review, American Economic Association, vol. 71(5), pages 946-60, December.
  3. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  4. Sheffrin, Steven M, 1979. "Unanticipated Money Growth and Output Fluctuations," Economic Inquiry, Western Economic Association International, vol. 17(1), pages 1-13, January.
  5. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September.
  6. Robert J. Gordon, 1979. "New Evidence That Fully Anticipated Monetary Changes Influence Real Output After All," NBER Working Papers 0361, National Bureau of Economic Research, Inc.
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  8. Robert J. Barro & Mark Rush, 1979. "Unanticipated Money and Economic Activity," NBER Working Papers 0339, National Bureau of Economic Research, Inc.
  9. William Poole, 2001. "Expectations," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 1-10.
  10. McCallum, Bennett T, 1979. "On the Observational Inequivalence of Classical and Keynesian Models," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 395-402, April.
  11. Sargent, Thomas J, 1976. "The Observational Equivalence of Natural and Unnatural Rate Theories of Macroeconomics," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 631-40, June.
  12. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  13. Frederic S. Mishkin, 1980. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
  14. Mullineaux, Donald J, 1980. "Unemployment, Industrial Production, and Inflation Uncertainty in the United States," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 163-69, May.
  15. Michael R. Darby, 1980. "Unanticipated or Actual Changes in Aggregate Demand Variables: A Cross-Country Analysis," NBER Working Papers 0589, National Bureau of Economic Research, Inc.
  16. Haraf, William S., 1978. "Inventories, orders and the persistent effects of monetary shocks," Proceedings, Federal Reserve Bank of San Francisco, issue 2, pages 63-86.
  17. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  18. Levi, Maurice D & Makin, John H, 1979. "Fisher, Phillips, Friedman and the Measured Impact of Inflation on Interest," Journal of Finance, American Finance Association, vol. 34(1), pages 35-52, March.
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