Expectations and the Neutrality of Money

Abstract

In line with the recent literature of overlapping generations models (Lucas (1972), Azariadis (1981) and Azariadis and Guesnerie (1986)), an external monetary policy of fixing the stock of fiat money is implemented here. Firstly, the existence of a monetary rational expectations equilibrium is demonstrated. It is then shown that unless the economy is in a stationary equilibrium, no general conclusion may be derived concerning the correspondence between the above existence of equilibrium and the neutrality of money. This inconclusiveness stems from the dissimilarity between the monetary policy as taken by this literature and the one which is applied in practice.