| Abstract: | The paper examines the implications of the real balance effect for the neutrality of money in a small open economy model which contains an explicit treatment of aggregate supply. Two specific results emerge. First, an unanticipated monetary expansion is neutral in both the long and short runs, whilst an anticipated increase in the money supply has real short-run effects. Secondly, the non-neutrality associated with an anticipated monetary expansion manifests itself in a fall in output and employment during the transition to the new steady-state. |
