In this paper we show that if markets are incomplete and there are nominal assets, whose payoff is denominated in money, monetary policy will be in general non-neutral. The mechanism through which monetary policy operates is a change in the structure of the rates of return: by changing the level of money prices monetary policy affects the payoffs of nominal assets. This differs from previous arguments for non-neutrality. We also show that a consideration of this effect of monetary policy may allow us to claim the superiority, from a welfare point of view, of a random money growth rate over a deterministic one. Journal of Economic Literature Classification Numbers: D52, E50, G10. © 1994 Academic Press, Inc.
On the Non-neutrality of Money with Incomplete Markets
GOTTARDI, Piero
1994-01-01
Abstract
In this paper we show that if markets are incomplete and there are nominal assets, whose payoff is denominated in money, monetary policy will be in general non-neutral. The mechanism through which monetary policy operates is a change in the structure of the rates of return: by changing the level of money prices monetary policy affects the payoffs of nominal assets. This differs from previous arguments for non-neutrality. We also show that a consideration of this effect of monetary policy may allow us to claim the superiority, from a welfare point of view, of a random money growth rate over a deterministic one. Journal of Economic Literature Classification Numbers: D52, E50, G10. © 1994 Academic Press, Inc.
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