Neutrality of money
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In economics, neutrality of money is the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages and exchange rates, having no effect on real variables like GDP, employment, and consumption. It is an important idea in classical economics and is related to the classical dichotomy. Money neutrality implies that the central bank cannot affect the real economy (eg, the number of jobs, the size of GDP, the amount of investment) by printing money. Any increase in the supply of money would be immediately offset by an equal rise in prices and wages.
Many economists argue that money neutrality is a good approximation for how the economy behaves over long periods of time, but in the short run, consider it likely that money might affect output. One argument is that prices and especially wages are 'sticky', and cannot be adjusted immediately to an unexpected change in the money supply. An alternative explanation for real economic effects from money supply changes is not that people can't change prices (because of menu costs, etc) but that they don't realize that they should. The bounded rationality 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 searching for a completed contract than without the monetary contraction. Furthermore, the floor on nominal wages changes imposed by most companies is observed to be zero; an arbitrary number by the theory of money's neutrality but a very real psychological threshold.
The New Keynesian research program in particular emphasizes models in which money is not neutral, and therefore monetary policy can affect the real economy.
Superneutrality of money is a stronger property than neutrality of money. If money is superneutral, then not only the level of the money supply, but also the rate of money supply growth, has no effect on real variables. Both the money supply and its growth rate affect nominal variables such as the price level and inflation rate in this case.
[edit] See also
[edit] References
Don Patinkin, (1987). "Neutrality of money," The New Palgrave: A Dictionary of Economics, v. 3, pp. 639-44.
