Monetary Policy Arithmetic: Reconciling Theory with Evidence

27 Pages Posted: 8 May 2006

See all articles by Maxim Nikitin

Maxim Nikitin

Higher School of Economics

Steven H. Russell

Indiana University Purdue University Indianapolis (IUPUI) - Department of Economics

Abstract

Empirical evidence indicates that, in countries with low inflation rates, a permanent decrease in inflation rate either has no impact on capital stock and output (superneutrality) or causes them to fall moderately. Existing budget arithmetic models of monetary policy cannot deliver superneutrality. In this paper, we conduct a budget arithmetic analysis of monetary policy using a money demand specification - money in the utility function - that is new to this literature. We find that one simple assumption about utility from money delivers superneutrality, while a more general assumption delivers departures from superneutrality in the direction consistent with the evidence.

Suggested Citation

Nikitin, Maxim and Russell, Steven H., Monetary Policy Arithmetic: Reconciling Theory with Evidence. Canadian Journal of Economics, Vol. 39, No. 1, pp. 348-374, February 2006, Available at SSRN: https://ssrn.com/abstract=877413 or http://dx.doi.org/10.1111/j.0008-4085.2005.00350.x

Maxim Nikitin (Contact Author)

Higher School of Economics ( email )

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Russia

Steven H. Russell

Indiana University Purdue University Indianapolis (IUPUI) - Department of Economics ( email )

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Indianapolis, IN 46202
United States
317-274-0420 (Phone)

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