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The Implications of an Endogenous Money Supply for Monetary Neutrality

  • Robert G. King
  • Bharat Trehan

This paper examines the implications of an endogenous money supply for the perceived(by econometricians) and actual nonneutrality of money in rational expectations models of the class put forward by Lucas (1972, 1973) and Barro(1976, 1980) that stress incomplete information. First,if there is contemporaneous policy response (e.g., to interest rates),then a simultaneous equations bias produces inconsistency in tests that use contemporaneous monetary statistics such as those proposed by King (1981) and Boschen-Grossman (1983).Thus, an econometrician might erroneously conclude that money is nonneutral ina fully classical model. Second, if money acts as a 'signal' about economic conditions then autonomous (policy induced) changes in the money stock can have real effects. In contrast to the nonneutrality of money in the Lucas-Barro analysis, which arises due to incomplete information about monetary aggregates, this nonneutrality requires that monetary information be utilized by economic agents.

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File URL: http://www.nber.org/papers/w1175.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1175.

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Date of creation: Aug 1983
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Publication status: published as King, Robert G. and Bharat Trehan. "Money: Endogeneity and Neutrality." Journal of Monetary Economics, (November 1984).
Handle: RePEc:nbr:nberwo:1175
Note: EFG
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  1. Cornell, Bradford, 1983. "Money Supply Announcements and Interest Rates: Another View," The Journal of Business, University of Chicago Press, vol. 56(1), pages 1-23, January.
  2. Charles Engel & Jeffrey A. Frankel, 1982. "Why Money Announcements Move Interest Rates: An Answer from the Foreign Exchange Market," NBER Working Papers 1049, National Bureau of Economic Research, Inc.
  3. Barro, Robert J & King, Robert G, 1984. "Time-separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 817-39, November.
  4. Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, vol. 2(1), pages 1-32, January.
  5. Robert G. King & Charles I. Plosser, 1982. "The Behavior of Money, Credit, and Prices in a Real Business Cycle," NBER Working Papers 0853, National Bureau of Economic Research, Inc.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Poole, William, 1975. "The Making of Monetary Policy: Description and Analysis," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 253-65, June.
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