Monetary policy arithmetic: reconciling theory with evidence

Maxim Nikitin () and Steven Russell

Canadian Journal of Economics, 2006, vol. 39, issue 1, 348-374

Abstract: Empirical evidence indicates that, in countries with low inflation rates, a permanent decrease in inflation rate either has no impact on capital stock and output (superneutrality) or causes them to fall moderately. Existing budget arithmetic models of monetary policy cannot deliver superneutrality. In this paper, we conduct a budget arithmetic analysis of monetary policy using a money demand specification - money in the utility function - that is new to this literature. We find that one simple assumption about utility from money delivers superneutrality, while a more general assumption delivers departures from superneutrality in the direction consistent with the evidence.

JEL-codes: E13 E60 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (7)

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