We study some implications of the Theory of Rational Beliefs to monetary policy. We show that monetary policy in a Rational Beliefs environment can have an important effect on the characteristics of economic fluctuations. In Rational Beliefs Equilibria money is generically non-neutral unlike Rational Expectations Equilibria in which money is neutral and monetary policy is ineffective. Under Rational Beliefs Equilibria nominal prices and real output change not only in response to changes in the exogenous growth rate of money but also in response to changes in the state of beliefs. In Rational Beliefs Equilibria monetary shocks have real effects even when they are observed but are not fully anticipated. Furthermore, the non-neutrality of money results in a short run Phillips curve. When money ¿flutters, real output sputters¿. We show that Endogenous Uncertainty and the distribution of market beliefs are the major explanatory variables of such fluctuations. Under Rational Expectations monetary policy is ineffective because agents neutralize it by predicting correctly the effect of the policy. Under Rational Beliefs it is shown instead that inflation and recessions can be substantially aggravated by the distribution of market beliefs.

Motolese, M., Endogenous Uncertainty and the Non-neutrality of Money, <<ECONOMIC THEORY>>, 2003; (21): 317-345. [doi:10.1007/s00199-002-0293-8] [http://hdl.handle.net/10807/14266]

Endogenous Uncertainty and the Non-neutrality of Money

Motolese, Maurizio
2003

Abstract

We study some implications of the Theory of Rational Beliefs to monetary policy. We show that monetary policy in a Rational Beliefs environment can have an important effect on the characteristics of economic fluctuations. In Rational Beliefs Equilibria money is generically non-neutral unlike Rational Expectations Equilibria in which money is neutral and monetary policy is ineffective. Under Rational Beliefs Equilibria nominal prices and real output change not only in response to changes in the exogenous growth rate of money but also in response to changes in the state of beliefs. In Rational Beliefs Equilibria monetary shocks have real effects even when they are observed but are not fully anticipated. Furthermore, the non-neutrality of money results in a short run Phillips curve. When money ¿flutters, real output sputters¿. We show that Endogenous Uncertainty and the distribution of market beliefs are the major explanatory variables of such fluctuations. Under Rational Expectations monetary policy is ineffective because agents neutralize it by predicting correctly the effect of the policy. Under Rational Beliefs it is shown instead that inflation and recessions can be substantially aggravated by the distribution of market beliefs.
2003
Inglese
Motolese, M., Endogenous Uncertainty and the Non-neutrality of Money, <<ECONOMIC THEORY>>, 2003; (21): 317-345. [doi:10.1007/s00199-002-0293-8] [http://hdl.handle.net/10807/14266]
File in questo prodotto:
File Dimensione Formato  
Money_Neutrality_OLG.pdf

accesso aperto

Descrizione: Pre-Published version
Dimensione 280.36 kB
Formato Adobe PDF
280.36 kB Adobe PDF Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/14266
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 10
  • ???jsp.display-item.citation.isi??? 10
social impact