Money Non-neutrality in a Rational Belief Equilibrium with Financial Assets.

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In Rational Beliefs Equilibria money is generically non-neutral. Given the expectational perspective proposed by the Theory of Rational Belief Equilibrium, we show that one of the most important factors in the emergence of money non-neutrality is played by Endogenous Uncertainty. This, in contrast to the Rational Expectations results of money neutrality and policy ineffectiveness, leads to a scenario in which monetary policy has an impact on the real economy and price volatility. The heterogeneity of beliefs together with the distribution and intensity of agents' states of optimism/pessimism can amplify the real effect of monetary policy and/or generate endogenous fluctuations in the economy which are not explained by any exogenous shock. We claim that money non-neutrality is mostly an expectations driven phenomenon. Indeed, additional assumptions of asymmetry of information and/or unanticipated monetary policy are not needed to explain the real effect of monetary policy as it is customary in the New Classical Theory.
Original languageEnglish
Pages (from-to)97-126
Number of pages30
JournalEconomic Theory
Publication statusPublished - 2001


  • Endogenous Uncertainty
  • Monetary Policy
  • Money non neutrality
  • Rational Belief Equilibrium
  • Rational Beliefs
  • Rational Expectations
  • States of Belief


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