This paper studies the dynamic volatility properties of a monetary economy in which agents hold Rational Beliefs (see Kurz (1994), (1997)) rather than Rational Expectations. Except for this feature the examined Rational Belief Equilibrium (in short, RBE) is entirely standard: markets are competitive, prices are flexible and all information is symmetric. The paper demonstrates a) The RBE paradigm offers an integrated theory of real and financial volatility with a high volume of trade. Most volatility in an RBE is induced endogenously through the beliefs of agents. b) Although our RBE assumes fully competitive markets in which prices are fully flexible,the diverse expectations of agents can explain most of the familiar features of monetary equilibria. This includes, money nonneutrality, Phillips curve and impulse response functions with respect to monetary shocks. c) Agents with diverse but inconsistent beliefs may induce socially undesirable excess fluctuations even when the allocation is ex-ante Pareto optimal. Central bank policy should aim to reduce the endogenous component of this volatility.

Motolese, M., Kurz, M., Jin, H., Endogenous Fluctuations and the Role of Monetary Policy, in Frydman, S. W. A. (ed.), Knowledge, information and expectations in modern macroeconomics: essays in honor of Edmund S. Phelps, Princeton University Press, Princeton 2003: 188- 227 [http://hdl.handle.net/10807/14276]

Endogenous Fluctuations and the Role of Monetary Policy

Motolese, Maurizio;
2003

Abstract

This paper studies the dynamic volatility properties of a monetary economy in which agents hold Rational Beliefs (see Kurz (1994), (1997)) rather than Rational Expectations. Except for this feature the examined Rational Belief Equilibrium (in short, RBE) is entirely standard: markets are competitive, prices are flexible and all information is symmetric. The paper demonstrates a) The RBE paradigm offers an integrated theory of real and financial volatility with a high volume of trade. Most volatility in an RBE is induced endogenously through the beliefs of agents. b) Although our RBE assumes fully competitive markets in which prices are fully flexible,the diverse expectations of agents can explain most of the familiar features of monetary equilibria. This includes, money nonneutrality, Phillips curve and impulse response functions with respect to monetary shocks. c) Agents with diverse but inconsistent beliefs may induce socially undesirable excess fluctuations even when the allocation is ex-ante Pareto optimal. Central bank policy should aim to reduce the endogenous component of this volatility.
Inglese
Knowledge, information and expectations in modern macroeconomics: essays in honor of Edmund S. Phelps
0-691-09485-3
Motolese, M., Kurz, M., Jin, H., Endogenous Fluctuations and the Role of Monetary Policy, in Frydman, S. W. A. (ed.), Knowledge, information and expectations in modern macroeconomics: essays in honor of Edmund S. Phelps, Princeton University Press, Princeton 2003: 188- 227 [http://hdl.handle.net/10807/14276]
File in questo prodotto:
File Dimensione Formato  
KurzJinMoto 26_09.pdf

accesso aperto

Descrizione: Pre-Published version
Dimensione 766.91 kB
Formato Adobe PDF
766.91 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: http://hdl.handle.net/10807/14276
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? 4
social impact