Abstract
In an important but neglected paper, Begg (1980) attempted to solve the puz-zle of monetary super-neutrality in the steady-state. Super-neutrality was shown to depend on two sufficient conditions, only one of which is necessary. Begg argued that a more general specification restores monetary non-super-neutrality. This note suggests an additional sufficient condition for super-neutrality. The demand for real balances must be modeled as a de-creasing function of the real interest rate. This has implications for models as-suming a steady-state. Harkness (1978) had already shown that the extra suf-ficient condition is a necessary condition for existence.
Highlights
In an important but neglected paper, Begg (1980) attempted to solve the puzzle of monetary super-neutrality in the steady-state
The demand for real balances must be modeled as a decreasing function of the real interest rate
This note argues there is an additional sufficient condition for monetary super-neutrality in the class of models described by Begg
Summary
In an important but neglected paper, Begg (1980) attempted to solve the puzzle of monetary super-neutrality in the steady-state. The proposition of super-neutrality, that changes in the rate of growth of the money supply do not affect real economic variables—which was taken for granted in the rational expectations (RE) literature (Lucas, 1981)—was shown to depend on two sufficient conditions, only one of which is necessary. This note argues there is an additional sufficient condition for monetary super-neutrality in the class of models described by Begg. Money is super-neutral if the demand for real balances is a decreasing function of the real interest rate This possibility was never considered in the macroeconomic literature of the period.
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