Politics,Psychology,and the Neutrality Proposition

Abstract

This paper provides a political-psychological explanation to the otherwise somewhat pessimistic accounts of the (structural) neutrality (invariance) proposition in the Rational Expectations (RE) money-output literature.

We argue that: 1. The methodology for detecting unanticipated monetary policy, in its present form, might be flawed; 2. The political information, discussed in this paper, is of a “pure” expectational nature. This is due to the psychologically convenient limited information basis it has, and the complete lack of direct-stimuli effects, resulting from its existence in different explanatory models; 3. Existing unanticipated monetary policy should probably be partitioned into two unanticipated sources: “punishing expectations”, concerning an adjusting average metaphor, capable of apply ‘punishing expectations’ whenever economic conditions do not conform with its own egocentric welfare; and, real shocks to the system, unanticipated by both parts to the macroeconomic game, the public and policy-makers as well.

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