MONETARY MACROECONOMICS

Monetary Macroeconomics

Monetary Macroeconomics

Theoretical Concept of Non-Neutral Money

The greatest disorder of the mind is to believe that things are a certain way because we want to be well. One of the most widespread and dangerous errors was to assume the neutrality of money. As discussed below, the money will be one of the main protagonists in the problem of the business cycle, which is why we must be careful not to regard it as something ethereal and neutral. This idea of neutrality is where then follows the idea of a "price level" that moves up or down with changes in the quantity of money, but without altering relatively. It ignored the fact that variations in the quantity of money can never alter the prices of all goods in exactly the same proportion and at exactly the same time (Davidson, 2002, p. 8). Neither paid attention to the fact those changes in the purchasing power of money to affect buyers than sellers, thus leading to changes in the market.

There is general agreement that in the short-term changes in the quantity of money have real effects. If that were not the case, monetary policy would be meaningless and strategy, for example, to reduce unemployment with inflation would be just as useless. That is, the practice of monetary policy is not a contradiction with the neutrality of money. The point, however, it happens in the long term. If money is neutral, then the market converges to the same point of balance that would have been had there been no change in the amount of money, so in the long run it does not matter if the central bank follows a rule or has discretion (Davidson, 2002, p. 8). That is, money is a veil that does not affect the long-term relative prices; the price level does not matter. The money is not relevant to the structure of market equilibrium.

While any amount of money can be optimal in equilibrium that does not mean that any amount of money it is out of balance. The issue is whether the effects of change of money have an effect during the transition to equilibrium. If changes in the amount of money have effect on the determinants of equilibrium, then the equilibrium structure will see altered and therefore such changes are not neutral (Mankiw, 2011, p. 44-51).

Obviously, the "defense" or elaboration of the concept of neutrality of money was based on a mathematical methodology, which includes the total money in the market, the price level, the volume of trade and the speed (average) circulation currency. While this reasoning would seem to present a strong argument on the principle of "price level", is a classic case of circular reasoning. The equation in question presupposes neutrality of money and "price level" that is trying to prove. Implicitly assume that money is neutral and then check whether it is through the "price level" and using statistical averages and relative price discriminate is not a proper way to defend this principle (Mankiw, 2011, ...