Neutrality of money

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In economics , neutrality of money means that changes in the money supply do not have any influence on real variables such as consumption or unemployment, but only influence money prices and wages. The overwhelming view is that money is neutral in the long term, but not in the short term.

Analytically, according to classical and neoclassical ideas, there is a dichotomy (Greek: dichotomy ) between the real and monetary sectors of an economy . According to this notion, money lies like a “veil” over transactions, but does not affect relative prices and the real sector of the economy, at least not in the long term. In the short term, however, the prevailing opinion is that money is not neutral, which is particularly evident in hyperinflation .

Super neutrality of money means that not only changes in the absolute money supply but also changes in money supply growth have no influence on real economic variables. Super neutrality is a stronger property than neutrality and is only met in certain models.

Theoretical background

In macroeconomic theory, two fundamental ideas have been developed to explain how changes in the money supply work.

The first approach comes from neoclassical theory of real business cycles . Proponents of this approach believe that wages and prices adjust to clear the markets. If the money supply changes, all prices in the economy adapt quickly to the greater availability of money. Deviations from previously existing equilibria in the goods markets do not occur to any significant extent. Such a model uses e.g. For example, it is assumed that wages and prices can actually change very quickly - and in both directions. Due to the rapid and equilibrium-neutral reaction of the markets to changes in the money supply, the economy can be mentally divided into a real and a monetary sector. The two sectors hardly interact. With regard to the real economic variables, money is neutral in these models, since it only fulfills the function of a medium of exchange. The level of real national income and the relative prices of goods and factors are thought to be fixed by real processes. A proportional increase in nominal prices and wages does not produce any real economic changes; money is neutral.

The neutrality of money does not apply in the macroeconomic models of Keynesianism . It is not assumed here that prices and wages will change very quickly. Rather, they often remain constant for a short time, even though macroeconomic conditions such as the money supply change. In particular, providers produce as much as is demanded at the short-term price level. An expansion of the money supply leads to higher demand on the part of buyers; the providers produce more in response and the real economy is growing. If there is less demand than is produced - for example because the money supply is falling - then unemployment occurs. The real sector and the monetary sector are closely related here.

Theories of only conditional money neutrality

Knut Wicksell

The neo-classical economist Knut Wicksell introduced the term "neutrality of money" into monetary theory . He created the terms “neutral” and “stable value” money and defined the term neutral money by deriving it from the relationship between monetary interest and natural interest. According to him, the monetary interest is neutral when its value corresponds to the level of the natural interest. By natural interest, Wicksell understood the interest that corresponds to the real return of capital in production. This interest rate thus enables price level stability. The concept of neutral money created by Wicksell was taken up by some theorists such as Carl Menger ("internal exchange value of money") and Karl Helfferich ("indifferent money"). Among other theorists, however, his theory found no significant support or was even rejected. For example, David Davidson raised the objection early on that Wicksell had not taken into account the changes on the goods side, especially those in technical productivity, in his book “Money Interest and Goods Prices”. Davidson argues that increasing productivity can increase profit prospects as long as commodity prices remain unchanged. Therefore, according to Davidson, the natural (real) interest rate has become too high compared to the monetary interest rate. However, money and business theorists did not deal in detail with Wicksell's theses about the neutrality of money until the late 1920s and later.

Friedrich v. Hayek

Friedrich v. Hayek sees the neutrality of money as a desirable state, but this state is due to changes in the money supply, e.g. B. repealed because of the monetary policy of the central bank, the hoarding or the hoarding of money by the citizens.


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Web links

Individual evidence

  1. Stefan Homburg (2015) Superneutrality of Money under Open Market Operations.
  2. Romer, D. (2012): Advanced Macroeconomics . Fourth edition McGraw-Hill Irwin.
  5. Ralph Anderegg: Grundzüge der Geldtheorie und Geldpolitik , Oldenbourg Verlag, 2007, ISBN 9783486581485 , p. 285