The Real Balance Effect and the Non-neutrality of Money in a Simple Model of a Small Open Economy

Phillip Lawler

Bulletin of Economic Research, 1997, vol. 49, issue 1, 1-15

Abstract: The paper examines the implications of the real balance effect for the neutrality of money in a small open economic model which contains an explicit treatment of aggregate supply. Two specific results emerge. First, an unanticipated monetary expansion is neutral in both the long and short runs, whilst an anticipated increase in the money supply has real short-run effects. Secondly, the non-neutrality associated with an anticipated monetary expansion manifests itself in a fall in output and employment during the transition to the new steady-state. Copyright 1997 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research

Date: 1997
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