Inside Money and Monetary Neutrality

50 Pages Posted: 28 May 2004 Last revised: 2 Sep 2022

See all articles by Peter R. Hartley

Peter R. Hartley

Rice University - Department of Economics; National Bureau of Economic Research (NBER)

Carl E. Walsh

University of California at Santa Cruz; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 1986

Abstract

This paper examines the interaction between the financial and real sectors of the economy within the framework of a stochastic, rational expectation model that distinguishes between inside and outside money. The model also can be used to study the impact of variations in the degree of intermediation, measured by the elasticity of bank deposit supply. In contrast to earlier work which emphasized confusion between monetary and real shocks, we focus on the role played by confusion between inside and outside money and temporary and permanent base money disturbances. Financial sector disturbances, as well as temporary shocks tothe monetary base, are shown to have real effects even when private agents have complete information. When contemporaneous information on economic disturbances is incomplete, permanent shocks to the monetary base also have real effects. If our model is correct, it is invalid to reject equilibrium models of the business cycle on the grounds that anticipated money affects output. We argue that this result is robust in the sense that many "reasonable" models which incorporate inside money would yield a non-neutrality of portfolio and temporary base money supply shocks.

Suggested Citation

Hartley, Peter R. and Walsh, Carl E., Inside Money and Monetary Neutrality (April 1986). NBER Working Paper No. w1890, Available at SSRN: https://ssrn.com/abstract=227161

Peter R. Hartley (Contact Author)

Rice University - Department of Economics ( email )

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Houston, TX 77005
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National Bureau of Economic Research (NBER)

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Carl E. Walsh

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
408-459-4082 (Phone)
408-459-5900 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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