Monetary Neutrality

9 Key excerpts on "Monetary Neutrality"

• 

  eBook - PDF

  Monetary Economics

  Theories, Evidence and Policy

  • David G. Pierce, Peter J. Tysome(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  We shall now move on to give rather fuller consideration to the concept of neutrality and to the conditions upon which it depends. The term neutrality, as applied to the role of money, is somewhat ambiguous. One interpretation is that money is neutral if it simply acts as a 'veil' over the workings of the 'real' economy. If it is, then this would suggest that a 'real' barter economy functions in much the same way as a monetary economy. However, as we saw in Chapter 1, the existence of money helps to reduce the inefficiencies of barter and thereby brings about higher levels of output etc. From this point of view money is clearly not neutral. Consequently the discussion of neutrality is now conducted in the context of a money-using economy. Money is said to be neutral when starting from a position of equilibrium; an increase in the supply of money results in a new position of equilibrium being reached at which only nominal values have changed, all real variables retaining the values they had before the increase in the money supply. In this sense neutrality is assessed on the basis of comparative static analysis and long-run equilibrium characteristics. At least two other interpretations of neutrahty may be mentioned. One considers whether changes in the rate of growth of the money supply has any effect on the equilibrium growth path of the economy and if it does not, money is said to be superneutral. No further consideration will be given to this interpretation as we shall not be discussing growth models. The other interpretation is usually considered in the context of discussions of stabilization policy, and considers whether systematic policy-induced changes in the money supply can have any effect on real variables, even in the short run. If it cannot then again, rather confusingly, money is said to be superneutral. We wiU be considering this interpretation of neutrality in Chapters 7 and 11.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Money, Inflation and Business Cycles

  The Cantillon Effect and the Economy

  • Arkadiusz Sieroń(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Those meanings are shown in Table 1.1 – let’s analyze them now and prove that economists often wrongly color conclusions from one concept of neutrality with conclusions from another concept. Table  1.1 Types of money neutrality Types of money neutrality Impact Institutional neutrality The existence of money does not impact the functioning of economy Static neutrality Quantity of money does not impact real prosperity Dynamic neutrality Changes in money supply do not impact real economic variables Super-neutrality Changes in the pace of increasing money supply do not impact real economic variables Monetary Neutrality Existence of equilibrium on the money market, expressed as the MV constant (quantity of money in circulation multiplied by the speed of circulation) Source: Author’s compilation Institutional neutrality 2 According to the first view, neutrality of money is defined as a situation in which monetary economy behaves like barter economy. 3 In other words, in this definition money “is merely a ‘veil’ that can be removed and relative prices can be analyzed, as if the system was based on natural exchange” (Lange, 1961). Barter market, due to its supposed lack of “frictions”, is a standard benchmark used for analyzing the impact of monetary factors on economy (Hayek, 1935, pp. 130–1). The problem with this view is that barter economy in actuality experiences great frictions – that being one of the reasons which inclined people to begin using money, because it makes trading much quicker and more convenient

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Money, Income and Time

  A Quantum-Theoretical Approach

  • Alvaro Cencini(Author)
  • 2013(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  According to the monetarists, however, the neutrality of money is only verified in the long-run, the short-term effect of a variation in M being characterized by a possible change both in the levels of prices and of output. In the words of Stein, we can say that the monetarists 'believe that there is a short-run trade off between the speed at which inflation is reduced and the temporary rise in the unemployment rate' (1981: 139). Pushing the dichotomy to its extreme consequences, the so-called new-classical economists 1 take a more rigorous position, and claim, that, even in the short-run, anticipated monetary changes affect the price level without modifying either the level of output or velocity. The neutrality of money is therefore a central feature of New Classical Economics (NCE). As Tobin tells us, the NCE 'relies heavily on the neutrality of money, even on super-neutrality, and applies the 'classical dichotomy' to continuously moving equilibrium' (1981: 35). For the sake of precision it must, however, be stressed that this new school of thought does not discard the possibility of interferences between monetary and real changes. According to Lucas — unanimously considered to be the father of the rational-expectations school — monetary fluctuations 'lead to real output movements in the same direction' when 'the information conveyed to traders by market prices is inadequate to permit them to distinguish real from monetary disturbances' (1981: 84). His work is an attempt to reconcile the neutrality of money with the unpredictability of monetary changes by resorting to the rational-expectations hypothesis (i.e. to the assumption 174 Appraisal of Traditional Monetary Analysis that the forecast error is a serially uncorrelated term with a zero expectation).

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The Monetary Theory of Production

  Tradition and Perspectives

  • G. Fontana, R. Realfonzo, G. Fontana, R. Realfonzo(Authors)
  • 2005(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Money, that is to say, is employed, but is treated as being in some sense neutral . .. That, however, is not the distinction which I have in mind when I say that we lack a monetary theory of production. An economy, which uses money but uses it merely as a neutral link between transactions in real things and real assets and does not allow it to enter into motives or decisions, 1 2 Introduction: The Monetary Theory of Production might be called- for want of a better name- a real exchange economy. The theory which I desiderate would deal, in contradistinction to this, with an economy in which money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy. (Keynes 1933, pp. 408-9; italics in original) A similar plea for an MTP is also part of the surviving early drafts of The General Theory of Employment, Interest and Money (Keynes, 1979). In these drafts Keynes explains the difference between the classical theory and his theory in terms of three alternative theoretical representations of the economic system, namely a 'real-wage economy', a 'neutral economy', and a 'money-wage economy' (Fontana and Gerrard, 2002). A 'real-wage economy' is a barter economy. In the 'real-wage economy' the factors of production are rewarded by allocating in agreed proportions the actual outcome of their cooperative efforts. Thus a 'real-wage economy' is also a cooperative economy. If, however, the factors of production receive their agreed share of output in monetary units rather than in specie, then the economic context of behaviour is better termed a 'neutral economy'.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Money, Markets and Capital

  • Jean Cartelier(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Essentiality and neutrality are analyti-cally distinct questions . The fact is, as we shall see, that models adapted for dealing with essentiality – search models – are not well-suited for discussing neutrality (the quest for the optimal quantity of money in search models is a symptom of this difficulty). The price paid for money essentiality seems to be a farewell to money neutrality. Money neutrality: an elementary solution Let us come back to Exchange Equation (2–3) in the basic model above. If the following additional assumptions are made: (a) V and T are independent from M , (b) M is an independent variable determined from outside systems (2–1) or (2–2), we get the Quantity Theory of Money (QTM). The interesting property of QTM, in that simple and crude formalization, is money neutrality. What does it mean? Analytically, it means that multiplying M by a factor γ does not change equilibrium value of p and multiplies P by a factor γ (homogeneity of degree 0 of p and of degree 1 of P ); it means also that the preliminary rejection of money – which founds value approaches – is a good research strategy since money does not affect the basic propositions of value theory, all of which only concern real variables. But the debates about neutrality show that the story is not that simple. Two important considerations – dynamics and distributional effects – make neutral-ity a too expansive property in terms of restrictive assumptions. Neutrality, comparative statics and dynamics Neutrality proposition results from a comparison between two equilibria, where money quantity is respectively M and γ M . Neutrality is a matter of compara-tive statics. But comparative statics does not make sense unless some transient trajectories are stable. A strong belief was common to economists during the interwar period and immediately after WWII: money is not neutral in the short-term (transient adjustment) but is neutral in the long-term (comparative statics).

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Collected Papers on Monetary Theory

  • Robert E. Lucas Jr., Max Gillman, Robert E. Lucas, Jr., Robert E Lucas, Max Gillman(Authors)
  • 2013(Publication Date)
  • Harvard University Press

    (Publisher)

  375 . 16 . Nobel Lecture: Monetary Neutrality I. Introduction The work for which I have received the Nobel Prize was part of an effort to understand how changes in the conduct of monetary policy can influence inflation, employment, and production.* So much thought has been de-voted to this question and so much evidence is available that one might reasonably assume that it had been solved long ago. But this is not the case: It had not been solved in the 1970s when I began my work on it, and even now this question has not been given anything like a fully satisfactory an-swer. In this lecture I shall try to clarify what it is about the problem of bringing available evidence to bear on the assessment of different mone-tary policies that makes it so difficult and to review the progress that has been made toward solving it in the last two decades. From the beginnings of modern monetary theory, in David Hume’s marvelous essays of 1752, Of Money and Of Interest, conclusions about the effect of changes in money have seemed to depend critically on the way in which the change is effected. In formulating the doctrine that we now call the quantity theory of money, Hume stressed the units-change aspect of changes in the money stock and the irrelevance of such changes to the be-havior of rational people. Journal of Political Economy 104, no. 4 (August 1996): 661–682. *I thank Nancy Stokey for invaluable discussion and criticism. I am also very grateful for comments from William Brock, John Cochrane, Milton Friedman, Lars Hansen, Anil Kashyap, Randall Kroszner, Bennett McCallum, Casey Mulligan, Sherwin Rosen, Allen Sanderson, Thomas Sargent, John Taylor, Neil Wallace, Warren Weber, and Jörgen Weibull. 376 Collected Papers on Monetary Theory It is indeed evident that money is nothing but the representation of la-bour and commodities, and serves only as a method of rating or estimat-ing them.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Monetary Economics

  Policy and its Theoretical Basis

  • Keith Bain, Peter Howells(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  1 The meaning of money 1.1 Introduction 1.2 Functions and forms of money 1.3 Money in the aggregate 1.4 Formal definitions of money 1.5 Official measures of money 1.6 Summary 2 3 13 16 20 27 ‘We must have a good definition of Money, For if we do not, then what have we got, But a Quantity Theory of no-one-knows-what, And this would be almost too true to be funny.’ Kenneth Boulding, Journal of Money, Credit and Banking , Vol I, Aug 1969 p 555. 1.1 Introduction Monetary economics is the branch of economics dealing with money and mone-tary relationships in the economy. This is a broad definition which can include topics such as the reasons for the existence of money, the roles money performs in economic exchange, the transfer of wealth or models of economic growth. However, as the sub-title makes clear, this book is interested principally in mon-etary policy and hence on the macroeconomic aspects of monetary economics - on the links between money and the general level of prices, output, and employment both in the short- and long-term. Within this, monetary economists have been particularly concerned with the relationship between the rate of growth of the money supply and the rate of inflation and the question of the ‘neutrality’ of money — whether changes in the quantity of money in an economy have an impact on the ‘real’ values of output and employment or influence only the gen-eral level of prices. This has led to a great deal of theory but we should always recall that a major aim of monetary economics is to produce a better understanding of the operation and impact of monetary policy: what, if anything, governments and/or central banks can do to improve the way in which economies perform through the use of the instruments of monetary policy or, at least, to avoid damaging the perform-ance of the real economy. Monetary policy is now regarded as central to the welfare of households and the profitability of firms.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Collected Papers on Monetary Theory

  • Robert E. Lucas Jr., Max Gillman, Robert E. Lucas, Jr., Robert E Lucas, Max Gillman(Authors)
  • 2013(Publication Date)
  • Harvard University Press

    (Publisher)

  16

  Nobel Lecture: Monetary Neutrality

  I. Introduction

  The work for which I have received the Nobel Prize was part of an effort to understand how changes in the conduct of monetary policy can influence inflation, employment, and production.* So much thought has been devoted to this question and so much evidence is available that one might reasonably assume that it had been solved long ago. But this is not the case: It had not been solved in the 1970s when I began my work on it, and even now this question has not been given anything like a fully satisfactory answer. In this lecture I shall try to clarify what it is about the problem of bringing available evidence to bear on the assessment of different monetary policies that makes it so difficult and to review the progress that has been made toward solving it in the last two decades.

  From the beginnings of modern monetary theory, in David Hume’s marvelous essays of 1752, Of Money and Of Interest , conclusions about the effect of changes in money have seemed to depend critically on the way in which the change is effected. In formulating the doctrine that we now call the quantity theory of money, Hume stressed the units-change aspect of changes in the money stock and the irrelevance of such changes to the behavior of rational people.

  It is indeed evident that money is nothing but the representation of labour and commodities, and serves only as a method of rating or estimating them. Where coin is in greater plenty, as a greater quantity of it is required to represent the same quantity of goods, it can have no effect, either good or bad . . . any more than it would make an alteration on a merchant’s books, if, instead of the Arabian method of notation, which requires few characters, he should make use of the Roman, which requires a great many. [Of Money , p. 32]1

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Contemporary Monetary Theory

  Studies of some Recent Theories of Money, Prices and Production

  • Raymond J. Saulnier(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  Almost all of the criticisms urged against the Austrian posi-tion that have been discussed above, with the exception of Knight's theoretical differences, have been leveled directly against the concept of neutral money (considered as a constant volume of effective circulation) when viewed as a norm of policy. This is quite understandable, for most of the theory of Prices and Production seems to lead logically to this policy as the only one which will maintain economic stability. How-ever, certain passages in Prices and Production provide good reason for questioning the relevance of this sort of criticism. In his reply to Hansen and Tout, 187 Professor Hayek said that . . . the concept of neutral money was meant in the first place to be an instrument of theoretical analysis and not neces-sarily a tool of practical policy. 188 Furthermore, concerning the attempt to maintain neutrality in the money supply, he has said that . . . it is by no means inconceivable that considera-tions other than the direct monetary influences on prices, such as the existence of long term contracts in fixed sums of money, the rigidity of prices, and such like institutional factors, may 186 See above, p. 216, n. 4. 187 Capital and Industrial Fluctuations, Econometrica, vol. ii, no. ii, April, 1934; reprinted in the second edition of Prices and Production. 188 Prices and Production, pp. 160-161. T H E P O L I C Y OF N E U T R A L M O N E Y 2 8 9 make such an attempt entirely impracticable, because it would set up frictions of a new kind. In that case, the task of mone-tary policy would be to find a workable compromise between the different incompatible aims. 198 Clearly, then, as far as matters of policy are concerned, Hayek is neither advancing a neutral money norm in the usually expressed sense nor is he neglecting the influence of rigidity in the institutional pattern. 1 * 0 Again, in another passage, we find Hayek arguing that .

  Sign up to read

  Learn more about book