On model ambiguity and money neutrality

Abraham Lioui () and Patrice Poncet

Journal of Macroeconomics, 2012, vol. 34, issue 4, 1020-1033

Abstract: We solve for the equilibrium of a stochastic neo-classical continuous time model without and with money under model ambiguity. We show that: (i) the correction for ambiguity stemming from the money supply is nil at equilibrium; (ii) money is neutral with respect to the stock market equilibrium (the equity risk premium); (iii) money is not neutral with respect to consumption and capital accumulation, and its effect may be quantitatively substantial; (iv) the preference for model robustness affects all the real economic variables as well as the expected inflation rate and the nominal interest rate.

Keywords: Money neutrality; Dynamic monetary equilibrium; Model misspecification; Preference for robustness; Risk aversion; Stochastic money supply process; Stochastic capital growth process (search for similar items in EconPapers)
JEL-codes: E31 E40 E52 O42 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:34:y:2012:i:4:p:1020-1033

DOI: 10.1016/j.jmacro.2012.08.003

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