Abstract
This note gives a counterexample on Reis [1]. Using a certain family of utility functions, this note not only gives a sharper representation than that of Reis but also demonstrates that interest rate inelastic money demand does not lead to superneutrality. This implies that superneutrality does not exist when uncerinty is introduced.
Highlights
Reis [1] characterized the dynamics of the money-in-thetility model (Sidrauski, [2]) by using the money demand function to explain the mechanism in a very intuitive manner
Using a certain family of utility functions, this note gives a sharper representation than that of Reis and demonstrates that interest rate inelastic money demand does not lead to superneutrality
One of his main conclusions is that when asming that the government can control nominal interest rates by setting any growth rate of money supply, monetry policy does not affect any level of consumption and capital stock as long as either money demand is inelastic with respect to nominal interest or money and consumption are separable in the utility function
Summary
Reis [1] characterized the dynamics of the money-in-thetility model (Sidrauski, [2]) by using the money demand function to explain the mechanism in a very intuitive manner. One of his main conclusions is that when asming that the government can control nominal interest rates by setting any growth rate of money supply, monetry policy does not affect any level of consumption and capital stock as long as either money demand is inelastic with respect to nominal interest or money and consumption are separable in the utility function. The product of both elasticities converges to a finite value, such a policy is still effective
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
