Non-neutrality Of Money Research Articles

Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money

Strategic Inattention, Inflation Dynamics, and the Nonneutrality of Money

Surprise by Anticipated Inflation

This paper proposes a theoretical model with two types of households to explore the distributional effects of inflation, assess the non-neutrality of money; and in return, to provide a guideline for policymakers in setting inflation rate. An impatient borrower who faces a borrowing constraint holds a positive amount of debt in equilibrium while a patient lender engages in consumption smoothing. Hence, inflation affects net worth of borrowers via nominal debt by redistributing resources away from lender, rendering welfare gains for the borrower and losses for the lender; and the structure of borrowing constraint gives rise to non-neutrality of anticipated inflation. The utilitarian welfare gain from generating inflation in a cashless economy is amplified when heterogeneous productivity levels are assumed. Yet, incorporating money demand in the form of money-in-utility model suggests that an inflation tax as an additional distortion reverses the overall positive effect of generating inflation in the cashless economy. JEL Classifications: E31, E37, E41, E52, D63.

Inflation response in a New Keynesian model with money illusion

AbstractThis study investigates the role of money illusion (MI) in a dynamic stochastic general equilibrium model. We introduce MI such that households, in their intertemporal optimization, erroneously recognize nominal variables as real ones. We find that first, our model could exhibit money nonneutrality in the long run; second, the Taylor principle is a sufficient condition for determinacy but not a necessary condition; third, the response to output in monetary policy rule matters for the model not to exhibit money nonneutrality in the long run; and finally, MI could flatten the slope that represents the output‐inflation trade‐off.

Theory of the shifting modes of reproduction: Where do the non-nuetrality of money and economic cycles come from?

The theory of switching modes of reproduction (SMR) is a relatively new branch of heterodox macroeconomic theory. The SMR-models have two distinctive properties: they allow endogenous economic cycles and posess non-neutrality of money in the long term. The latter property means that in the SMR-models monetary expansion can effectively stimulate economic growth. The original form of the SMR-models (a complicated system of differential equations) makes them difficult for general theoretical analysis. In this article I propose a simpler version of the SMR-model in discrete time, for which, under certain assumptions, an explicit closed-form solution is derived. I use a formalism that is close to that accepted in the macroeconomic mainstream. All key structural features of the original SMR-model were retained, and the constructed model has the two properties mentioned. The model is used to identify particular assumptions that lead to existence of fluctuations and non-neutrality of money. It is shown that endogenous fluctuations are associated with very specific and not entirely realistic assumptions about the process of formation and depreciation of fixed capital. It is also revealed that the non-neutrality of money in the SMR-theory arises from the assumption that financial constraints are the only constraints of the investment process. Equivalently, this assumption can be re-formulated as a postulate of the unlimited labor supply with the exceptional ability of monetary expansion to employ it. If we adjust the model by adding the condition of limited labor supply, then money becomes neutral, and monetary stimulus loses its effectiveness. Based on the findings, the recommendation to rely on monetary easing in order to accelerate economic growth which is advocated by the authors of the original SRM-theory is called into question.

Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money

Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money

A critical analysis of the loanable funds theory: some notes on the non-neutrality of money

A critical analysis of the loanable funds theory: some notes on the non-neutrality of money

Dispersed information and the non-neutrality of money: fifty years after Lucas, 1972

ABSTRACT This paper highlights the renewed interest in Lucas’s explanation of the non-neutrality of money put forward in his 1972 article – explanation based on information dispersion and signal extraction problems – by an increasing part of the literature investigating the transmission mechanism of monetary policy shocks. We review the main contributions to this renewal, and illustrate the relationship between this work and Lucas’s own model. We also show that some of the assumptions made by this line of research have been questioned by subsequent developments on the same track, thereby challenging its ability to produce large amounts of monetary non-neutrality and calling for further research.

Моделирование кредитной эмиссии в растущей экономике: долгосрочные эффекты и эксцессы

According to experts, the factor of monetary emission has not been studied enough among the factors which influence the emergence of long-period economic cycles. The neutrality of money is one of the reasons of long-period cycles. The authors of the article disagree with this opinion, since they support the concept of the non-neutrality of money in the long run. Accordingly, the purpose of the article is to investigate the features of this non-neutrality. Methodologically, the study relies on the mathematical modeling. The study has been conducted using the model of switching reproduction mode (SMR) created at the Institute of Economics of the Russian Academy of Sciences — as a mesoeconomic mathematical model that calculates macro- and mesoeconomic changes based on the calculation of circulation of money, giving due regard the inflation with periodic renewal of fixed capital. The resulting lag effects of this update bring dynamics to the model and determine its most significant advantage. The main attention is given to credit emission. The nonlinear (threshold) effects accompanying credit issue make the analysis of its consequences more complicated. Numerical experiments are used to examine the influence of the debt load of the production subsystems s and the interest rate r on changes in the dynamics of the economic system. These effects in combination with other factors can lead to long-term dynamics in macroeconomic processes. The study includes a preliminary analysis of the ways to overcome the negative effects accompanying credit emission. It is justified that credit emission alone is not sufficient and additional emission by the Central Bank is necessary. Although additional emission may have a more serious inflationary impact, it can to a certain extent reduce the negative impact of credit emission. The results of the study can be used to substantiate recommendations for optimizing monetary policy.

On the Basic Preconditions of Non-Neutrality of Money in Economic Theory

Based on the experimental calculations carried out with the help of the shifting mode reproduction model, as well as on the theoretical studies of Marx, Schumpeter, Keynes and his followers - representatives of the post-Keynesian direction, two conclusions were made in the article. First, that non-neutrality of money takes place in both short- and long-term periods, and second, that each of these periods has its own basic preconditions for non-neutrality. For the short term, it is a "phenomenon of nominal rigidity", and for the long term, it is a "phenomenon of capitalization of money". The thesis is justified that the "phenomenon of nominal rigidity" manifests itself mainly within the framework of the existing production, when the economic growth caused by the increase in money supply is achieved by increasing capacity utilization and engagement of idle labor. Accordingly, the "phenomenon of capitalization of money" manifests itself through the conversion of issued money into investments in fixed capital and, through the growth of this capital (and capacities), affects the GDP growth. It is shown that behind the two considered basic prerequisites there are fundamentally different theoretical approaches. Behind the short-term "phenomenon of nominal rigidity" there is an orthodox vision of economy focused on the equilibrium pricing mechanism. Behind the long-term "phenomenon of capitalization of money" there is a heterodox vision related to the mechanism of money circulation, emission and economic growth caused by it. It has been concluded that in case of probable increase of competition between these theoretical approaches it is unacceptable if short-term basic preconditions of non-neutrality of money are used in the analysis of long-term processes and long-term preconditions are used in the analysis of short-term growth cases.

The non-neutrality of money: a response to Dr. Humphrey

This article answers Dr. Humphrey contention on the similarities between monetarist and Austrian approaches to the neutrality of money. Monetarists at most only concentrate on short term non neutrality while Austrians base their analysis in short, medium and long term non neutrality. For the more, monetarists lack a true theory of capital that could let then understand thet even with flexible markets money would not be neutral in the short term.
 Key words: Economic cycles, neutrality of money, short and long term effects of money, capital theory.
 JEL Classification: B53, B49, D01, K13.
 Resumen: El presente artículo contesta la tesis del Dr. Humphrey según la cual las diferencias entre austriacos y monetaristas son ficticias pues algunos de éstos también reconocieron los efectos distorsionadores del crecimiento monetario sobre los precios relativos. El artículo demuestra que la teoría austriaca considera que el dinero no es neutral ni a corto, ni a medio ni a largo plazo y ello contrasta con el enfoque monetarista que solo reconoce la no neutralidad a corto plazo y por razones equivocadas al carecer de una verdadera teoría del capital.
 Palabras clave: Ciclo económico, neutralidad del dinero, corto plazo, largo plazo, teoría del capital.
 Clasificación JEL: B53, B49, D01, K13.

Testing the long-run neutrality and superneutrality of money in a developing country: Evidence from Iran

This paper investigates the long-run money neutrality (LMN) and long-run money superneutrality (LMSN) hypothesis for both the industry sector and the entire Iranian economy by using the data of 1979–2018 and applying Fisher and Seater's (1993) ARIMA framework. Conventional unit root tests, including PP, ADF, and KPSS, are applied to determine the order of integration of variables; however, since the structural break in variables is not considered in these methods, Lee-Strazicich and Zivot-Andrews methods are also applied to take it into account. The findings of money neutrality investigation in the Iranian industry sector show that when the monetary base is the criterion, money neutrality is confirmed, but when liquidity and money volume are the criteria, money neutrality is rejected. Also, the neutrality of money is accepted considering all three monetary aggregates (M1, M2, and M3) in investigating the entire economy. It is not feasible to examine the superneutrality of money since unit root tests confirm that all the variables are I (1).•As there is more than one structural break in the time series of the study, applying the Lee-Strazicich unit root test has made the results more reliable.•Neutrality of money testing is not efficient in the case of cointegration between model variables. Thus, the Gregory-Hansen test, which investigates cointegration considering the structural break, is applied.•The results of this research can guide policy-makers.•Non-neutrality of money in the industrial sector shows the positive effect of monetary policy on this sector when considering the probability of destructive effects on other sectors.

КОНЦЕПЦИЯ МАКРОЭКОНОМИЧЕСКОЙ ПОЛИТИКИ КОМПРОМИССА МЕЖДУ ИНФЛЯЦИЕЙ И РОСТОМ

The article describes a concept of a long-term macro-economic policy based on a compromise between economic growth and inflation that accompanies this growth. This concept differs from the existing theoretical approaches supported by monetary authorities in that it does not rely on the notion of Russia as a small open economy and it does not focus on price volatility as the number one problem in the long-term perspective. The theoretical framework usually used to address the relationship between economic growth and inflation is the Phillips curve and its modifications. In our study, this problem is connected to the phenomenon of non-neutrality of money in the long term. The analysis uses the simulation model of the shifting mode of reproduction (SMR model) and econometric methods. It is shown that a compromise between economic growth and inflation can be achieved if the long-term monetary policy results in the approximately equal rates of real GDP and inflation. Such monetary policy is possible to realize provided that some important macro-economic conditions are fulfilled, for example, the rouble undervaluation coefficient is reduced, the debt-to-gross-domestic- product ratio is increased, the ratio of international (foreign exchange) reserves to GDP is decreased, and the transition to a fiscal deficit policy is implemented. In other words, a systemic approach is required. This is not an easy way but it will ensure a growth in GDP rates and lower inflation.

J. Laurence Laughlin versus Irving Fisher on the quantity theory of money, 1894 to 1913

AbstractIn the controversy leading to the Federal Reserve Act of 1913, J. Laurence Laughlin of the University of Chicago and Irving Fisher of Yale were the leading opponent and proponent, respectively, of the quantity theory of money as the theoretical basis for reorganizing the US monetary system. Laughlin identified the quantity theory with bimetallist claims that monetizing silver would have lasting real benefits. Laughlin offered a cost of production theory of the value of gold as an alternative to the quantity theory, while his students published empirical critiques of the quantity theory. Fisher upheld the quantity theory as explaining price movements while distancing the theory from assertions of long-run non-neutrality of money. Laughlin and Fisher vigorously debated monetary theory and monetary reform, notably at American Economic Association meetings. Their confrontations illuminate the monetary controversies preceding the Federal Reserve Act, which reflected the views of Laughlin and Willis (adviser to Congressman Carter Glass) while rejecting the mandate to stabilize the price level proposed by Senator Owen and his adviser Fisher.

Monetary policy and transaction costs: Empirical analysis of consumption function for the United States of America (1988–2014)

Abstract In macroeconomic theory, different approaches discuss the ability of monetary policy to affect real variables in the long run. This research proposes the empirical application of a theoretical model that includes nominal rigidities arising from transaction costs and real rigidities arising from the firms’ competition structure. Thus, based on data from the US economy we propose to test the theoretical results combining the existence of shocks arising from both real factors and factors affecting the money market, establishing tests for shocks of supply and aggregate demand. The concern is to investigate if the economic policy is capable of affecting the long run (average) values of the real private consumption. Time series analysis methodology of Structural Vector Autoregressive (SVAR) models was used to test long run relationship for US economy. The ability to establish the long run relationships between these aggregates with some degree of confidence, allow simulating shocks by impulse response functions and variance decomposition. The theoretical results of the model indicate that productivity, transaction costs (number of transactions with credit/debit cards) and currency money tend to positively influence consumption, whereas delinquency have a negative effect on consumption. We tested two empirical specifications and both confirmed the theoretical results for the US economy and, therefore, the research can help policymakers to measure the long run consequences of their decisions, that is, the results converge on the non-neutrality of money in the long run in the US economy.

Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money

How does competition affect information acquisition of firms and thus the response of inflation and output to monetary policy shocks? This paper addresses these questions in a new dynamic general equilibrium model with both dynamic rational inattention and oligopolistic competition. In the model, rationally inattentive firms acquire information about the endogenous beliefs of their competitors. Moreover, firms with fewer competitors endogenously choose to acquire less information about aggregate shocks – a novel prediction of the model that is supported by empirical evidence from survey data. A quantitative exercise disciplined by firm-level survey data shows that firms' strategic inattention to aggregate shocks associated with oligopolistic competition increases monetary non-neutrality by up to 77% and amplifies the half-life of output response to monetary shocks by up to 30%. Furthermore, the model matches the relationship between the number of firms' competitors and their uncertainty about inflation as a non-targeted moment.

Analysis of the relationship between issuing money, inflation and economic growth with the help of the SMR-model

A model of the shifting mode of reproduction (SMR-4), considering inflation as an endogenous phenomenon, has been built. A new approach to explaining the non-neutrality of money in the short and long term has been proposed. Scenario calculations were performed using the SMR-4 model. The main theoretical result: it is shown that the well-known position on the neutrality of money in the long term is only a special case of the economy’s response to issuing money. Depending on the income indexation coefficient (w), issuing money in the long run can generate growth without inflation, can generate both growth and inflation at the same time, finally, it can lead to inflation against the background of a recession (stagflation). Using the SMR-4 model, it is shown that the preservation of restrictive monetary policy in Russia for the period up to 2022 can be explained by the overestimated level of the coefficient w. The latter reflects the state of the basic institutions of the economy. The higher it is, the less developed they are. The increased w index indicates a situation where capital owners spend their income on anything but investment in domestic fixed capital. Some measures have been proposed to change this situation.

Переосмысление эмпирических данных об отсутствии нейтральности денег в экономике

The article rethinks the empirical data of non-neutrality of money in the economy. According to modern empirical data, there is a relationship between the money supply and the real variables — real output, unemployment and relative prices. However, the understanding of the fact that the money supply is a nominal variable, which cannot be related to the real situation of the economy. These considerations raise doubts about the existence of above-mentioned dependence. Moreover, the paper proves that the changes of money supply do not affect the real variables. These arguments cause the need to rethink the empirical data of non-neutrality of money in the economy. Further analysis shows that another parameter has impact on real variables — agents ‘purchasing power of money (income). This variable changes simultaneously with the change in money supply and this variable is the one that influences the real variables. Thus, the impact of monetary policy on the economic system is only through the redistribution of income between agents. As a result, monetary policy is only a less effective fiscal policy.

Money, Wealth, Time Preference, and Marginal Impatience

This paper addresses whether the monetary expansion can create wealth in the long-run and how this wealth creation is related to the nature of the marginal impatience when preferences are recursive with money yielding utility to infinitely-lived agents. We show that the neutrality or the non-neutrality of money in terms of wealth creation depends on whether the marginal impatience is increasing, decreasing, or remaining constant. In particular, if the marginal impatience is constant, money is super-neutral and does not affect wealth creation. On the other hand, if the marginal impatience is increasing or decreasing, money is non-super-neutral and affects wealth creation, positively if the marginal impatience is growing in consumption and real balances, and negatively if the marginal impatience is decreasing in consumption and real balances. These results place the long-debated neutrality-of-money issues in perspective concerning wealth creation and time preference.

On Otaki’s Keynesian Macroeconomic Model

“Otaki model” is an overlapping generations (OLG) model with fiat money and imperfect competition. It derives Keynesian implications such as involuntary unemployment, welfare-improving fiscal and monetary policy, and money non-neutrality. Though its structure can be applied to other models with productive implications, the Otaki model has not been fully understood by economists. One reason could be that in seminal works about the Otaki model, he implicitly changed the hidden assumptions, and hence, the implications of the model. By employing such assumptions, he aimed at dealing with multiplicity of equilibria in the OLG model. This paper points out the hidden assumptions and reinterprets the Otaki model from the viewpoint of multiple equilibria.

Sticky Price Models, Durable Goods, and Real Wage Rigidities

AbstractThe standard two‐sector New Keynesian model with durable goods is at odds with conventional wisdom and vector autoregression (VAR) evidence: Following a monetary shock, the model generates (i) either negative or no comovement across sectoral outputs and (ii) aggregate neutrality of money when durable goods' prices are flexible. We reconcile theory with evidence by incorporating real wage rigidities into the standard model: As long as durable goods' prices are more flexible than nondurable goods' prices, we obtain positive sectoral comovement and, thus, aggregate nonneutrality of money.