THE EFFECTS OF UNCERTAINTY ABOUT THE MONEY SUPPLY PROCESS IN A RATIONAL EXPECTATIONS MACROECONOMIC MODEL*

DOIhttp://doi.org/10.1111/j.1467-9485.1983.tb01008.x
Date01 June 1983
AuthorN. W. Duck
Published date01 June 1983
Swrruh
Jwrnulo/
P~ilirrcal
Ecwioiny.
Vol.
30. No.
2.
June
1983
43
1YX3
Scottish
Economic
Society
THE EFFECTS OF UNCERTAINTY ABOUT
THE MONEY SUPPLY PROCESS
IN
A
RATIONAL EXPECTATIONS
MACROECONOMIC MODEL*
N.
W.
DUCK
University
of
Bristof
INTRODUCTION
There are a number of plausible circumstances in which uncertainty about the
money supply may be different in form from that which is usually assumed in
both the theoretical and empirical work on unanticipated monetary growth.
Usually the money supply is assumed
to
grow in accordance with a process
which is stable and known but which contains a stochastic error whose value
in any period is unpredictable. Lucas (1973, Barro (1976), Sargent and
Wallace (1975) in their theoretical work, and Barro (1977, 1978), Attfield
Demery and Duck (1981a, 1981b), and Attfield and Duck (1982) in their
empirical work all assume monetary growth processes
of
this general form.
Sargent and Wallace (1981) however have recently considered an economy
in which a large budget deficit cannot be for ever financed by bond sales and,
unless closed, must be financed at some uncertain future date
by
monetary
expansion. Uncertainty here concerns the date at which a change in the money
supply process will occur; in other words, uncertainty is
at
least partly about
the current
or
future money supply process itself.
This type of uncertainty might also arise where governments abruptly
change the stance of monetary policy in response to electoral pressures. To the
extent that the timing
of
these recurring shifts is imprecise uncertainty will
surround both the value
of
any stochastic error in the money supply process
and the process itself.
Finally, a similar type
of
uncertainty will result from the election of
a
government which is committed to monetary restraint but which is politically
vulnerable. Sargent (1981) cites the
U.K.
Conservative government elected in
1979 as an example of such a government and informally discusses its resultant
failure to achieve credibility
for
its monetary policy.
In
this paper we explore the implications
of
an uncertain money supply
process using a standard rational expectations macroeconomic model. We
assume that the government switches recurringly between a loose and a tight
*The research in this paper was financed by
a
grant from the Leverhulme Trust which is
gratefully acknowledged.
I
would like
to
thank
Cliff
Attfield, Angus Deaton, David Demery and
an anonymous referee
for
helpful comments. All
errors
are my own responsibility.
Date
of
receipt
of
final manuscript
:
28 February 1983.
142

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