Summary of results

Abstract

Chapter 1 discussed the effects of an exogenous, anticipated money shock when the environment is characterized by strategic complements and is represented in nominal terms (NTC). According to the Neutrality hypothesis H₀, an anticipated money shock should be neutral irrespective of the representation or the strategic properties of the economic environment. This hypothesis is clearly rejected. Aggregate-level data show that an anticipated monetary shock causes massive nominal rigidity (see result R1) and monetary non-neutrality (R2): Average nominal prices only adjust to the new equilibrium level after 12 periods, and average efficiency losses are large in the first few periods before the shock (−65% impact effect). The results provide support for the notion of short-run non-neutrality of anticipated monetary shocks, but also for long- run neutrality of money since aggregate behavior eventually converges to the predicted equilibrium (R3). Individual-level data show that subjects behave very rationally given their expectations (R4). Most importantly, price expectations are sticky and are much less correct after the shock (R5). These findings allowed the formulation of a first tentative explanation of the causes of monetary non-neutrality (R6): because expectations were sticky (i.e. subjects expected other subjects to adjust nominal prices only a little) and because subjects chose best replies to their expectations, sticky expectations lead to sticky nominal price choices given strategic complementarity. This downward nominal rigidity translates into real income losses. The loss decomposition supports this explanation. It shows that the efficiency losses mainly result because subjects hold wrong expectations about aggregate price behavior (R7). Consequently, subjects are less confident in their ability to predict the price level. The announcement of the anticipated monetary shock seems to have fundamentally shaken the process of expectation formation (R8).