IDEAS home Printed from https://ideas.repec.org/p/rye/wpaper/wp074.html
   My bibliography  Save this paper

The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model

Author

Listed:
  • Eric Kam

    (Department of Economics, Ryerson University, Toronto, Canada)

  • John Smithin

    (Department of Economics, York University, Toronto, Canada)

  • Aqeela Tabassum

    (The Business School, Humber College, Toronto, Canada)

Abstract

This paper provides an explanation of the long-run neutrality of monetary policy in a dynamic general equilibrium model with micro-foundations. If the rate of time preference is endogenous there is no natural rate of interest. Therefore, if the central bank follows an interest rate rule this will affect the real rate of interest in financial markets and thereby the real economy. In principle, there is a negative relationship between the real rate of interest and the rate of inflation. This turns out to be nothing other than the historical “forced savings effect”, or the twentieth century Mundell-Tobin effect.

Suggested Citation

  • Eric Kam & John Smithin & Aqeela Tabassum, 2018. "The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model," Working Papers 074, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp074
    as

    Download full text from publisher

    File URL: https://www.arts.ryerson.ca/economics/repec/pdfs/wp074.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Keynes,John Maynard, 2012. "The Collected Writings of John Maynard Keynes," Cambridge Books, Cambridge University Press, number 9781107658066 edited by Johnson,Elizabeth & Moggridge,Donald, January.
    2. Troy Davig & Eric M. Leeper, 2010. "Generalizing the Taylor Principle: Reply," American Economic Review, American Economic Association, vol. 100(1), pages 618-624, March.
    3. Michael Woodford, 1998. "Doing Without Money: Controlling Inflation in a Post-Monetary World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 173-219, January.
    4. Michael Woodford, 2010. "Robustly Optimal Monetary Policy with Near-Rational Expectations," American Economic Review, American Economic Association, vol. 100(1), pages 274-303, March.
    5. N. Gregory Mankiw, 2001. "U. S. Monetary Policy During the 1990s," Harvard Institute of Economic Research Working Papers 1927, Harvard - Institute of Economic Research.
    6. C. Rogers, 2006. "Doing without money: a critical assessment of Woodford's analysis," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 30(2), pages 293-306, March.
    7. John Smithin, 2013. "Essays in the Fundamental Theory of Monetary Economics and Macroeconomics," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7494, February.
    8. Smithin, John Nicholas, 1983. "A Note on the Welfare Cost of Perfectly Anticipated Inflation," Bulletin of Economic Research, Wiley Blackwell, vol. 35(1), pages 65-69, May.
    9. Sheila C. Dow & John Smithin, 1999. "The Structure of Financial Markets and the ‘First Principles’ of Monetary Economics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(1), pages 72-90, February.
    10. John Smithin, 2016. "Endogenous Money, Fiscal Policy, Interest Rates and the Exchange Rate Regime: A Comment on Palley, Tymoigne and Wray," Review of Political Economy, Taylor & Francis Journals, vol. 28(1), pages 64-78, January.
    11. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, vol. 97(3), pages 607-635, June.
    12. Jon P. Harkness, 1978. "The Neutrality of Money in Neoclassical Growth Models," Canadian Journal of Economics, Canadian Economics Association, vol. 11(4), pages 701-713, November.
    13. De Vroey,Michel, 2016. "A History of Macroeconomics from Keynes to Lucas and Beyond," Cambridge Books, Cambridge University Press, number 9781107584945, November.
    14. John Smithin, 2016. "Endogenous Money, Fiscal Policy, Interest Rates and the Exchange Rate Regime: Correction," Review of Political Economy, Taylor & Francis Journals, vol. 28(4), pages 609-611, October.
    15. McCallum, Bennett T., 1986. "Some issues concerning interest rate pegging, price level determinacy, and the real bills doctrine," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 135-160, January.
    16. Thomas M. Humphrey, 1993. "Money, Banking and Inflation," Books, Edward Elgar Publishing, number 236, March.
    17. Eric Kam & Mohammed Mohsin, 2006. "Monetary policy and endogenous time preference," Journal of Economic Studies, Emerald Group Publishing, vol. 33(1), pages 52-67, January.
    18. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71(3), pages 280-280.
    19. H. Sonmez Atesoglu & John Smithin, 2006. "Inflation targeting in a simple macroeconomic model," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 28(4), pages 673-688.
    20. Avi J. Cohen, 2003. "Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 199-214, Winter.
    21. John Smithin, 2007. "A real interest rate rule for monetary policy?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(1), pages 101-118.
    22. Rymes, Thomas K., 1998. "Keynes and Anchorless Banking," Journal of the History of Economic Thought, Cambridge University Press, vol. 20(1), pages 71-82, March.
    23. Harcourt,G. C. With contributions by-Name:Cohen,Avi J. With contributions by-Name:Mata,Tiago, 2022. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9781009158152, November.
    24. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, December.
    25. John Smithin, 1994. "Controversies In Monetary Economics," Books, Edward Elgar Publishing, number 412, March.
    26. Michael Woodford, 2011. "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 1-35, January.
    27. MacKinnon, Keith & Smithin, John, 1993. "An interest rate peg, inflation and output," Journal of Macroeconomics, Elsevier, vol. 15(4), pages 769-785.
    28. Thomas M. Humphrey, 1998. "Mercantilists and classicals: insights from doctrinal history. 1998 annual report of the Federal Reserve Bank of Richmond," Annual Report, Federal Reserve Bank of Richmond.
    29. Eric Kam & John Smithin, 2012. "Capitalism in One Country? A Re-examination of Mercantilist Systems from the Financial Point of View," Chapters, in: Louis-Philippe Rochon & Salewa ‘Yinka Olawoye (ed.), Monetary Policy and Central Banking, chapter 3, Edward Elgar Publishing.
    30. David K. H. Begg, 1980. "Rational Expectations and the Non-neutrality of Systematic Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(2), pages 293-303.
    31. J. E. King, 2012. "The Microfoundations Delusion," Books, Edward Elgar Publishing, number 14065, March.
    32. Epstein, Larry G & Hynes, J Allan, 1983. "The Rate of Time Preference and Dynamic Economic Analysis," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 611-635, August.
    33. Eric Kam & John Smithin, 2012. "A simple theory of banking and the relationship between commercial banks and the central bank," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 34(3), pages 547-552.
    34. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    35. John Smithin, 2003. "Controversies in Monetary Economics," Books, Edward Elgar Publishing, number 2541, March.
    36. Kam, Eric, 2005. "A note on time preference and the Tobin Effect," Economics Letters, Elsevier, vol. 89(1), pages 127-132, October.
    37. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    38. John Smithin, 2016. "Some puzzles about money, finance and the monetary circuit," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 40(5), pages 1259-1274.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paraskevopoulos, Christos C. & Paschakis, John & Smithin, John, 1996. "Is monetary sovereignty an option for the small open economy?," The North American Journal of Economics and Finance, Elsevier, vol. 7(1), pages 5-18.
    2. repec:hal:wpspec:info:hdl:2441/2961 is not listed on IDEAS
    3. repec:ebl:ecbull:v:5:y:2003:i:2:p:1-7 is not listed on IDEAS
    4. Paschakis, John & Smithin, John, 1998. "Exchange Risk and the Supply-Side Effects of Real Interest Rate Changes," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 703-720, October.
    5. Eric Kam & John Smithin, 2012. "Capitalism in One Country? A Re-examination of Mercantilist Systems from the Financial Point of View," Chapters, in: Louis-Philippe Rochon & Salewa ‘Yinka Olawoye (ed.), Monetary Policy and Central Banking, chapter 3, Edward Elgar Publishing.
    6. repec:spo:wpecon:info:hdl:2441/2961 is not listed on IDEAS
    7. Mohsin, Mohammed, 2004. "Exchange rate policies and endogenous time preference: a dynamic analysis of a small open economy," Economics Letters, Elsevier, vol. 82(2), pages 195-203, February.
    8. repec:spo:wpmain:info:hdl:2441/2961 is not listed on IDEAS
    9. repec:hal:spmain:info:hdl:2441/2961 is not listed on IDEAS
    10. Eckhard Hein & Christian Schoder, 2011. "Interest rates, distribution and capital accumulation -- A post-Kaleckian perspective on the US and Germany," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(6), pages 693-723, November.
    11. Ravenna, Federico & Seppälä, Juha, 2007. "Monetary policy, expected inflation and inflation risk premia," Bank of Finland Research Discussion Papers 18/2007, Bank of Finland.
    12. Jérôme Creel & Henri Sterdyniak, 1999. "La politique monétaire sans monnaie," Revue de l'OFCE, Programme National Persée, vol. 70(1), pages 111-153.
    13. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777, March.
    14. Tambakis, Demosthenes N., 2015. "Determinate liquidity traps," Economics Letters, Elsevier, vol. 135(C), pages 126-132.
    15. Richters, Oliver, 2021. "Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 846-866.
    16. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, vol. 90(Nov), pages 609-642.
    17. Agénor, Pierre-Richard, 2010. "A theory of infrastructure-led development," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 932-950, May.
    18. repec:hal:wpspec:info:hdl:2441/5122 is not listed on IDEAS
    19. Jérôme Creel & Henri Sterdyniak, 2001. "La théorie budgétaire du niveau des prix, un bilan critique," Revue d'économie politique, Dalloz, vol. 111(6), pages 909-939.
    20. Ravenna, Federico & Seppälä, Juha, 2007. "Monetary policy, expected inflation and inflation risk premia," Research Discussion Papers 18/2007, Bank of Finland.
    21. Alexander Tobon & Nicolas Barbaroux, 2015. "Credit and Prices in Woodford's New Neoclassical Synthesis," Economic Thought, World Economics Association, vol. 4(1), pages 21-46, March.
    22. Thomas Brand, 2017. "Vitesse et composition des ajustements budgétaires en équilibre général : une analyse appliquée à la zone euro," Revue économique, Presses de Sciences-Po, vol. 68(HS1), pages 159-182.
    23. Eric Kam & Paul Missios, 2003. "Wealth effects in a cash-in-advance economy," Economics Bulletin, AccessEcon, vol. 5(2), pages 1-7.
    24. repec:spo:wpmain:info:hdl:2441/5122 is not listed on IDEAS
    25. repec:hal:spmain:info:hdl:2441/5122 is not listed on IDEAS
    26. Etro, Federico, 2017. "Research in economics and macroeconomics," Research in Economics, Elsevier, vol. 71(3), pages 373-383.
    27. Pavel Potužák, 2016. "Může být přirozená úroková míra nulová? Neoklasický přístup [Can the Natural Rate of Interest Be Zero? A Neoclassical Approach]," Politická ekonomie, Prague University of Economics and Business, vol. 2016(1), pages 83-108.
    28. Sonali Das & Rangan Gupta & Patrick Kanda & Monique Reid & Christian Tipoy & Mulatu Zerihun, 2014. "Real interest rate persistence in South Africa: evidence and implications," Economic Change and Restructuring, Springer, vol. 47(1), pages 41-62, February.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rye:wpaper:wp074. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Doosoo Kim (email available below). General contact details of provider: https://edirc.repec.org/data/deryeca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.