Anticipated and Unanticipated Money in Thailand

Abstract

The rational expectation hypothesis was first introduced in the early 1960s, but its importance developed only after this concept was applied to neoclassical models in the 1970s. The earliest application of the rational expectation hypothe sis to macroeconomic stabilization policy issues was made by Robert E. Lucas, Jr. in his highly influential paper, Expectation and the Neutral ity of Money, (1972). Subsequently, Lucas (1972), and others argued that anticipated changes in aggregate demand policy will have already been taken into account by economic agents and will evoke no output or employment response. Therefore, feedback policy rules will have no impact on output fluctuations in the economy. Only unanticipated policies can cause changes in real output. The proposition of the rational expectation hypothesis that anticipated short-run monetary stabilization policies do not influence real economic variables has been named the Macro Rational Expectations (MRE) hypothesis by Modigliani (1977). The empirical validity of MRE has been a central issue in modern stabilization theory. Barro (1977), and Barro and Rush (1980), tested the neutrality implica tion of the MRE hypothesis that anticipated monetary policy does not matter by using a two step procedure where the money growth equa tion was estimated by ordinary least squares with the residuals from this equation represent ing unanticipated movements in money growth, and the fitted values, anticipated money. A measure of real output was then regressed on anticipated and unanticipated money. For the United States, they found unanticipated money growth variables had significant explanatory power. However, anticipated money was insig nificant.