NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Implications of an Endogenous Money Supply for Monetary Neutrality

Robert G. King, Bharat Trehan

NBER Working Paper No. 1175
Issued in August 1983
NBER Program(s):   EFG

This paper examines the implications of an endogenous money supply for the perceived(by econometricians) and actual nonneutrality of money in rational expectations models of the class put forward by Lucas (1972, 1973) and Barro(1976, 1980) that stress incomplete information. First,if there is contemporaneous policy response (e.g., to interest rates),then a simultaneous equations bias produces inconsistency in tests that use contemporaneous monetary statistics such as those proposed by King (1981) and Boschen-Grossman (1983).Thus, an econometrician might erroneously conclude that money is nonneutral ina fully classical model. Second, if money acts as a 'signal' about economic conditions then autonomous (policy induced) changes in the money stock can have real effects. In contrast to the nonneutrality of money in the Lucas-Barro analysis, which arises due to incomplete information about monetary aggregates, this nonneutrality requires that monetary information be utilized by economic agents.

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Document Object Identifier (DOI): 10.3386/w1175

Published: King, Robert G. and Bharat Trehan. "Money: Endogeneity and Neutrality." Journal of Monetary Economics, (November 1984).

 
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