ON THE NONNEUTRALITY OF MONEY WITH INCOMPLETE MARKETS

In this paper we show that if markets are incomplete and there are nom inal assets, whose payoff is denominated in money, monetary policy wil l be in general non-neutral. The mechanism through which monetary poli cy operates is a change in the structure of the rates of return: by ch anging the level of money prices monetary policy affects the payoffs o f nominal assets. This differs from previous arguments for non-neutral ity. We also show that a consideration of this effect of monetary poli cy may allow us to claim the superiority, from a welfare point of view , of a random money growth rate over a deterministic one. (C) 1994 Aca demic Press, Inc.