Anticipations and the Nonneutrality of Money

This paper examines the responses of the capital stock, output, and the price level to changes in the money stock in a neoclassical growth model in which money may not be neutral. The nonneutrality of money stems from the Tobin effect--the effect of anticipated inflation on capital accumulation. The adjustment of prices and output to monetary changes is shown not only to depend on whether the change is anticipated or not but also on the date at which the change first is anticipated. Adjustment patterns to anticipated changes show first Koyck leads and then Koyck lags. The model is extended to include labor supply effects of unanticipated inflation in Section XI. The paper concludes with discussions of the nature of the rational expectations solution chosen and of the mechanism producing the nonneutrality of money.