Shrinking money: the demand for money and the nonneutrality of money

We evaluate the macroeconomic implications of post-World War 11 money demand changes in two business cycle models: the limited participation model and the sticky price model. The sticky price model is invariant to changes in money demands. However, the limited participation model predicts the effect of a money shock on output rose by 100 percent between 1952 and 1980, and subsequently fell 65 percent. This prediction is hard to reconcile with evidence that suggests the effects of monetary shocks are stable over time, and suggests that goods market imperfections, rather than asset market imperfections, may be the driving force behind postwar U.S. monetary nonneutrality. (C) 2002 Elsevier Science B.V. All rights reserved.