Endogenous Fluctuations and the Role of Monetary Policy

56 Pages Posted: 28 Feb 2002

See all articles by Mordecai Kurz

Mordecai Kurz

Stanford University - Department of Economics

Hehui Jin

Stanford University

Maurizio Motolese

Catholic University of Milan

Date Written: January 2002

Abstract

This paper studies the dynamic volatility properties of a monetary economy in which agents hold Rational Beliefs (see Kurz (1994), (1997)) rather than Rational Expectations. Except for this feature the examined Rational Belief Equilibrium (in short, RBE) is entirely standard: markets are competitive, prices are flexible and all information is symmetric. The paper demonstrates a) The RBE paradigm offers an integrated theory of real and financial volatility with a high volume of trade. Most volatility in an RBE is induced endogenously through the beliefs of agents.

b) Although our RBE assumes fully competitive markets in which prices are fully flexible,the diverse expectations of agents can explain most of the familiar features of monetary equilibria. This includes, money non-neutrality, Phillips curve and impulse response functions with respect to monetary shocks.

c) Agents with diverse but inconsistent beliefs may induce socially undesirable excess fluctuations even when the allocation is ex-ante Pareto optimal. Central bank policy should aim to reduce the endogenous component of this volatility.

Suggested Citation

Kurz, Mordecai and Jin, Hehui and Motolese, Maurizio, Endogenous Fluctuations and the Role of Monetary Policy (January 2002). Available at SSRN: https://ssrn.com/abstract=302283 or http://dx.doi.org/10.2139/ssrn.302283

Mordecai Kurz (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Hehui Jin

Stanford University ( email )

Stanford, CA 94305
United States

Maurizio Motolese

Catholic University of Milan ( email )

L.go A. Gemelli, 1
Milano, MI 20123
Italy
+39-02-72342418 (Phone)

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