Money non-neutrality in a Rational Belief Equilibrium with financial assets

Maurizio Motolese ()

Economic Theory, 2001, vol. 18, issue 1, 97-126

Abstract: In Rational Beliefs Equilibria money is generically non-neutral. Given the expectational perspective proposed by the Theory of Rational Belief Equilibrium, we show that one of the most important factors in the emergence of money non-neutrality is played by Endogenous Uncertainty. This, in contrast to the Rational Expectations results of money neutrality and policy ineffectiveness, leads to a scenario in which monetary policy has an impact on the real economy and price volatility. The heterogeneity of beliefs together with the distribution and intensity of agents' states of optimism/pessimism can amplify the real effect of monetary policy and/or generate endogenous fluctuations in the economy which are not explained by any exogenous shock. We claim that money non-neutrality is mostly an expectations driven phenomenon. Indeed, additional assumptions of asymmetry of information and/or unanticipated monetary policy are not needed to explain the real effect of monetary policy as it is customary in the New Classical Theory.

Keywords: Money non-neutrality; Monetary policy; Rational expectations; Rational beliefs; Rational Belief Equilibrium; Endogenous uncertainty; States of belief. (search for similar items in EconPapers)
JEL-codes: C68 D5 D84 E52 (search for similar items in EconPapers)
Date: 2001-04-11
Note: Received: May 30, 2000; revised version: December 28, 2000
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Citations: View citations in EconPapers (12)

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