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Neutrality of money

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money supply in order to eliminate the negative effects of an unfavourable macroeconomic shock. However, monetary policy is not able to utilize the trade-off between inflation and real economic performance, because there is no information available in advance about the shocks to eliminate. Under these conditions, the central bank is unable to plan a course of action, that is, a countercyclical monetary policy. Rational agents can be conceited only by unexpected changes, so a well-known economic policy is completely in vain. However, and this is the point, the central bank cannot outline unforeseeable interventions in advance, because it has no informational advantage over the agents.
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will soon realize the actual state of affairs. As the higher wages were accompanied by higher prices, no real changes in income occurred, that is, it was no need to increase the labour supply. In the end, the economy, after this short detour, will return to the starting point, or in other words, to the natural rate of unemployment.
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See David Laidler (1992). "Hayek on Neutral Money and the Cycle," UWO Department of Economics Working Papers #9206. and Roger Garrison & Israel Kirzner. (1987). "Friedrich August von Hayek," John Eatwell, Murray Milgate, and Peter Newman, eds. The New Palgrave: A Dictionary of Economics London:
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made up the general framework in which the mechanisms underlying the Phillips curve could be scrutinized. The purpose of the first Lucasian island model (1972) was to establish a framework to support the understanding of the nature of the relationship between inflation and real economic performance
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chooses to increase the stock of money and, hence, the price level, agents will be never able to distinguish real and nominal changes, so they will regard the increase in nominal wages as real modifications, so labour supply will also be boosted. However, this change is only temporary, since agents
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of the money supply could affect real variables. A rise in the monetary growth rate, and the resulting rise in the inflation rate, lead to a decline in the real return on narrowly defined (zero-nominal-interest-bearing) money. Therefore, people choose to re-allocate their asset holdings away from
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to conceit people in order to increase the labour supply, unexpected changes can always trigger real changes. But what is the ultimate purpose of the central bank when changing the money supply? For example, and mostly: exerting countercyclical control. Doing so, monetary policy would increase the
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has no effect on real variables. In this case, nominal wages and prices remain proportional to the nominal money supply not only in response to one-time permanent changes in the nominal money supply but also in response to permanent changes in the growth rate of the nominal money supply. Typically
223:. It has been a heritage that there is a trade-off between inflation and unemployment or real economic performance, so it is undoubted that there is a short run Phillips curve (or there are short run Phillips curves). Although there are fewer possible actions available for the 66:, the size of real GDP, the amount of real investment) by creating money. Instead, any increase in the supply of money would be offset by a proportional rise in prices and wages. This assumption underlies some mainstream macroeconomic models (e.g., 187:, distinguished a series of short-run Phillips curves and a long-run one, where the short-run curves were supposed to be the conventional, negatively sloped curves, while the long-run curve was actually a vertical line indicating the 708: 682:
Roger Garrison & Israel Kirzner. (1987). "Friedrich August von Hayek," John Eatwell, Murray Milgate, and Peter Newman, eds. The New Palgrave: A Dictionary of Economics London: Macmillan Press Ltd., 1987,
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debt plays: since the nominal amount of debt is not in general linked to inflation, inflation erodes the real value of nominal debt, and deflation increases it, causing real economic effects, as in
426: 701: 144:, etc.), and cannot be adjusted immediately to an unexpected change in the money supply. An alternative explanation for real economic effects of money supply changes is not that people 152:
approach suggests that small contractions in the money supply are not taken into account when individuals sell their houses or look for work, and that they will therefore spend longer
298:, and the combined changes in the nominal interest rate and the inflation rate may leave real interest rates changed from previously. If so, real expenditure on physical capital and 112:. The term itself was first used by continental economists beginning at the turn of the 20th century, and exploded as a special topic in the English language economic literature upon 694: 1612: 1617: 673:(1933 in German). "On 'Neutral Money'," in F. A. Hayek. Money, Capital, and Fluctuations: Early Essays, edited by Roy McCloughry, Chicago, University of Chicago Press, 1984. 1602: 277:
Even if money is neutral, so that the level of the money supply at any time has no influence on real magnitudes, money could still be non-superneutral: the
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Many economists maintain that money neutrality is a good approximation for how the economy behaves over long periods of time but that in the short run
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on nominal wages changes imposed by most companies is observed to be zero: an arbitrary number by the theory of monetary neutrality but a
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by assuming that this relation offers no trade-off exploitable by economic policy. Lucas' intention was to prove that the Phillips curve
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Cargill, Thomas; Meyer, Robert (1977). "Intertemporal Stability of the Relationship Between Interest Rates and Price Changes".
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Levi, Maurice; Makin, John (1979). "Fisher, Phillips, Friedman, and the Measured Impact of Inflation on Interest".
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research program in particular emphasizes models in which money is not neutral in the short run, and therefore
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is a stronger property than neutrality of money. It holds that not only is the real economy unaffected by the
1271: 987: 116:'s introduction of the term and concept in his famous 1931 LSE lectures published as Prices and Production. 1153: 203: 188: 191:. According to Friedman, money was not neutral in the short run, because economic agents, confused by the 1645: 1467: 1249: 1181: 659: 655: 1524: 1499: 1354: 1349: 1308: 1276: 1063: 981: 67: 1544: 1534: 1281: 611:
Mitchell, Douglas W. (1985). "Expected Inflation and Interest Rates in a Multi-asset Model: A Note".
535: 1434: 1222: 514: 331: 246: 210:, also has its own Phillips curve. However, things are far more complicated in these models, since 679:(1992). "Hayek on Neutral Money and the Cycle," UWO Department of Economics Working Papers #9206. 1539: 1529: 1519: 1514: 1504: 1384: 1379: 1374: 895: 250: 236: 47: 1286: 1216: 1048: 401: 77:
When neutrality of money coincides with zero population growth, the economy is said to rest in
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The central bank has no information about what to eliminiate through countercyclical actions
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change prices but that they do not realize that it is in their interest to do so. The
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reject the neutrality of money, instead emphasizing the role that bank lending and
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for a completed contract than without the monetary contraction. Furthermore, the
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Fried, Joel; Howitt, Peter. "The effects of inflation on real interest rates".
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would affect output. One argument is that prices and especially wages are
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rejected neutrality of money both in the short term and in the long term.
1364: 920: 879: 825: 175:. The most important answers were elaborated within the framework of the 1148: 258: 172: 141: 109: 71: 63: 959: 890: 791: 787: 287: 589: 43: 650:, v. 3, pp. 639–44. Reprinted in John Eatwell et al. (1989), 96:
superneutrality is addressed in the context of long-run models.
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The Theory of New Classical Macroeconomics. A Positive Critique
117: 667:(1931) Prices and Production. London: G. Routledge & Sons. 272: 31: 108:, the concept of monetary neutrality goes back as far as 195:, always respond to changes in the money supply. If the 576:
Mundell, Robert (1963). "Inflation and Real Interest".
377:(3 ed.). Cambridge, Massachusetts: The MIT Press. 62:
does not affect the real economy (e.g., the number of
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Superneutrality of Money under Open Market Operations
294:. The shift in money demand can affect the supply of 171:
Neutrality of money has been a central question for
74:view money as being neutral only in the long run. 1637: 343: 261:. Post-Keynesians also emphasize the role that 50:. Neutrality of money is an important idea in 702: 349: 479: 282:money (that is, there is a decrease in real 437:The Collected Writings, vol 13, pp. 408–411 709: 695: 273:Reasons for departure from superneutrality 548: 123: 99: 610: 647:New Palgrave: A Dictionary of Economics 575: 508: 446: 416:Macmillan Press Ltd., 1987, pp. 609–614 1638: 690: 364: 312:Real versus nominal value (economics) 286:) and into real assets such as goods 406:, IDEAS. Retrieved 18 January 2015. 13: 1013:British credit crisis of 1772–1773 625:10.1111/j.1540-6261.1985.tb04977.x 563:10.1111/j.1540-6261.1979.tb02069.x 496:10.1111/j.1540-6261.1977.tb03305.x 14: 1662: 726:Commonwealth of Nations countries 643:(1987). "Neutrality of money," 30:variables in the economy such as 22:is the idea that a change in the 722:recessions in the United States 604: 569: 542: 132:applies, such that the nominal 502: 473: 440: 431: 419: 409: 391: 358: 214:were presumed. For Lucas, the 130:monetary-disequilibrium theory 1: 634: 490:(September 1977): 1001–1015. 243:can affect the real economy. 578:Journal of Political Economy 204:New classical macroeconomics 189:natural rate of unemployment 42:variables, like employment, 7: 1468:1997 Asian financial crisis 1101:Civil War-era United States 305: 93:rate of money supply growth 10: 1667: 1244:Post–World War I recession 1064:Post-Napoleonic Depression 371:Monetary Theory and Policy 1482: 1418: 1363: 1317: 1232: 1154:2nd Industrial Revolution 1147: 1094: 1087:(1836–1838 and 1839–1843) 1003:1st Industrial Revolution 1001: 970: 771:Price-and-wage stickiness 732: 457:10.1007/978-3-319-17578-2 425:See the Google NGRAM for 89:level of the money supply 1435:1990s United States boom 1223:Financial crisis of 1914 515:American Economic Review 337: 332:Quantity theory of money 257:play in the creation of 247:Post-Keynesian economics 85:Superneutrality of money 79:steady-state equilibrium 1250:Depression of 1920–1921 1182:Depression of 1882–1885 1096:Early Victorian Britain 831:Real and nominal values 652:Money: The New Palgrave 447:GalbΓ‘cs, Peter (2015). 251:monetary circuit theory 221:exists without existing 1355:Recession of 1969–1970 1350:Recession of 1960–1961 1309:Recession of 1937–1938 619:(June 1985): 595–599. 613:The Journal of Finance 584:(June 1963): 280–283. 551:The Journal of Finance 530:Cite journal requires 350:Patinkin, Don (1987), 300:durable consumer goods 124:Views and counterviews 100:History of the concept 58:. It implies that the 54:and is related to the 1473:Early 2000s recession 1440:Early 1990s recession 1392:Early 1980s recession 972:Commercial revolution 870:Nominal interest rate 557:(March 1979): 35–52. 212:rational expectations 185:adaptive expectations 70:models). Others like 1039:Copper Panic of 1789 38:, with no effect on 1375:1973–1975 recession 1319:Post–WWII expansion 993:Great Frost of 1709 821:Neutrality of money 802:Classical dichotomy 718:Economic expansions 352:Neutrality of Money 327:Classical dichotomy 150:bounded rationality 68:real business cycle 56:classical dichotomy 52:classical economics 20:Neutrality of money 1646:Monetary economics 1557:COVID-19 recession 1217:Panic of 1910–1911 1049:Panic of 1796–1797 875:Real interest rate 843:Economic expansion 483:Journal of Finance 197:monetary authority 91:but also that the 1633: 1632: 1344:Recession of 1958 1338:Recession of 1953 1332:Recession of 1949 1029:Thirteen Colonies 836:Velocity of money 766:Paradox of thrift 513:(December 1983). 466:978-3-319-17578-2 302:can be affected. 292:productive assets 164:threshold due to 1658: 1425:Great Regression 1420:Great Moderation 1266:Great Depression 1255:Roaring Twenties 776:Underconsumption 746:Effective demand 737:Aggregate demand 711: 704: 697: 688: 687: 683:pp. 609–614 629: 628: 608: 602: 601: 573: 567: 566: 546: 540: 539: 533: 528: 526: 518: 506: 500: 499: 477: 471: 470: 444: 438: 435: 429: 423: 417: 413: 407: 395: 389: 388: 376: 362: 356: 355: 347: 1666: 1665: 1661: 1660: 1659: 1657: 1656: 1655: 1636: 1635: 1634: 1629: 1494:Great Recession 1486: 1484:Information Age 1478: 1427: 1423: 1414: 1367: 1365:Great Inflation 1359: 1321: 1313: 1236: 1234:Interwar period 1228: 1164:Long Depression 1156: 1152: 1143: 1103: 1099: 1090: 1005: 997: 974: 966: 931:U.S. recessions 926:U.K. recessions 858:U.S. expansions 728: 715: 671:Friedrich Hayek 665:Friedrich Hayek 637: 632: 609: 605: 574: 570: 547: 543: 531: 529: 520: 519: 507: 503: 478: 474: 467: 445: 441: 436: 432: 427:'neutral money' 424: 420: 414: 410: 396: 392: 385: 374: 363: 359: 348: 344: 340: 308: 275: 241:monetary policy 225:monetary policy 208:Robert E. Lucas 181:Milton Friedman 126: 114:Friedrich Hayek 102: 17: 16:Economic theory 12: 11: 5: 1664: 1654: 1653: 1648: 1631: 1630: 1628: 1627: 1626: 1625: 1620: 1615: 1613:United Kingdom 1610: 1605: 1600: 1595: 1590: 1585: 1580: 1575: 1570: 1565: 1554: 1553: 1552: 1547: 1545:United Kingdom 1542: 1537: 1532: 1527: 1522: 1517: 1512: 1507: 1502: 1490: 1488: 1487:(2007–present) 1480: 1479: 1477: 1476: 1470: 1465: 1464: 1463: 1458: 1456:United Kingdom 1453: 1448: 1437: 1431: 1429: 1416: 1415: 1413: 1412: 1411: 1410: 1405: 1403:United Kingdom 1400: 1389: 1388: 1387: 1382: 1380:United Kingdom 1371: 1369: 1361: 1360: 1358: 1357: 1352: 1347: 1341: 1335: 1329: 1325: 1323: 1315: 1314: 1312: 1311: 1306: 1305: 1304: 1299: 1297:United Kingdom 1294: 1289: 1284: 1279: 1274: 1263: 1260: 1257: 1252: 1247: 1240: 1238: 1230: 1229: 1227: 1226: 1220: 1214: 1208: 1202: 1199: 1193: 1187: 1184: 1179: 1178: 1177: 1172: 1170:United Kingdom 1160: 1158: 1145: 1144: 1142: 1141: 1135: 1129: 1126: 1120: 1117: 1111: 1107: 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1215: 1212: 1211:Panic of 1907 1209: 1206: 1205:Panic of 1901 1203: 1200: 1197: 1196:Panic of 1893 1194: 1191: 1190:Baring crisis 1188: 1185: 1183: 1180: 1176: 1175:United States 1173: 1171: 1167: 1166: 1165: 1162: 1161: 1159: 1155: 1150: 1146: 1139: 1136: 1133: 1132:Panic of 1866 1130: 1127: 1124: 1123:Panic of 1857 1121: 1118: 1115: 1114:Panic of 1847 1112: 1109: 1108: 1106: 1102: 1097: 1093: 1086: 1085:Panic of 1837 1083: 1080: 1077: 1074: 1073:Panic of 1825 1071: 1068: 1065: 1062: 1059: 1056: 1053: 1050: 1047: 1044: 1043:Panic of 1792 1040: 1037: 1034: 1030: 1027: 1025: 1022: 1020: 1016: 1015: 1014: 1011: 1010: 1008: 1004: 1000: 994: 991: 989: 988:Slump of 1706 986: 983: 980: 979: 977: 973: 969: 961: 958: 957: 956: 953: 949: 946: 944: 941: 940: 939: 936: 932: 929: 927: 924: 922: 919: 917: 914: 912: 909: 907: 904: 902: 899: 897: 896:Balance sheet 894: 893: 892: 889: 885: 881: 878: 876: 873: 871: 868: 867: 866: 865:Interest rate 863: 859: 856: 854: 851: 849: 846: 845: 844: 841: 837: 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107: 104:According to 97: 94: 90: 86: 82: 80: 75: 73: 69: 65: 61: 57: 53: 49: 45: 41: 37: 34:, wages, and 33: 29: 26:affects only 25: 21: 1535:South Africa 1292:South Africa 1138:Black Friday 955:Unemployment 820: 812:Money supply 807:Disinflation 751:General glut 651: 644: 641:Don Patinkin 616: 612: 606: 581: 577: 571: 554: 550: 544: 523:cite journal 510: 504: 487: 481: 475: 448: 442: 433: 421: 411: 402: 393: 370: 360: 351: 345: 284:money demand 278: 276: 262: 245: 234: 229: 220: 202: 170: 145: 140:(because of 134:money supply 127: 106:Don Patinkin 103: 92: 88: 84: 83: 78: 76: 60:central bank 19: 18: 1603:New Zealand 1561:2020–2022; 1525:New Zealand 1498:2007–2009; 1444:1990–1991; 1428:(1982–2007) 1396:1980–1982; 1368:(1973–1982) 1346:(1957–1958) 1340:(1953–1954) 1334:(1948–1949) 1322:(1945–1973) 1287:New Zealand 1270:1929–1939; 1246:(1918–1919) 1237:(1918–1939) 1219:(1910–1912) 1213:(1907–1908) 1207:(1902–1904) 1198:(1893–1897) 1192:(1890–1891) 1168:1873–1879; 1157:(1870–1914) 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306:See also 290:or even 44:real GDP 1598:Namibia 1186:1887–88 1128:1860–61 1119:1853–54 1110:1845–46 1081:1833–34 1078:1828–29 1069:1822–23 1019:England 911:Rolling 797:Chronic 263:nominal 28:nominal 1623:Zambia 1583:Canada 1573:Belize 1510:Canada 1475:(2001) 1451:Canada 1398:Canada 1277:Canada 948:Supply 943:Demand 916:Shapes 906:Global 816:demand 741:Supply 656:p. 273 596:  463:  381:  255:credit 146:cannot 138:sticky 118:Keynes 32:prices 1588:India 1515:India 1282:India 938:Shock 756:Model 594:S2CID 375:(PDF) 338:Notes 158:floor 1328:1945 1060:1812 724:and 720:and 661:287. 654:, p 645:The 536:help 461:ISBN 379:ISBN 249:and 235:The 64:jobs 40:real 658:-- 621:doi 586:doi 559:doi 492:doi 453:doi 1642:: 617:40 615:. 592:. 582:71 580:. 555:34 553:. 527:: 525:}} 521:{{ 511:73 488:32 486:. 459:. 269:. 179:. 168:. 81:. 1422:/ 1151:/ 1098:/ 1041:/ 882:/ 814:/ 790:/ 739:/ 710:e 703:t 696:v 627:. 623:: 600:. 588:: 565:. 561:: 538:) 534:( 498:. 494:: 469:. 455:: 387:.

Index

stock of money
nominal
prices
exchange rates
real
real GDP
consumption
classical economics
classical dichotomy
central bank
jobs
real business cycle
monetarism
Don Patinkin
David Hume
Friedrich Hayek
Keynes
monetary-disequilibrium theory
money supply
sticky
menu costs
bounded rationality
searching
floor
psychological
money illusion
monetarism
Phillips curve
Milton Friedman
adaptive expectations

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