CONCEPT OF NON-NEUTRAL MONEY

The Theoretical Concept of Non-Neutral Money

The Theoretical Concept of Non-Neutral Money

Introduction

Non-neutral money simply means that adjusting the money supply will have real effects on production and consumption. Research suggest that there is a real effect on the market caused by changes in the amount of money, that is because we are not in the long term and therefore, still have not disappeared for all purposes. No empirical evidence can contradict the principle of non-neutrality of money because you can always reply that have not yet eliminated all short-term effects. One type of response that rarely has been criticized several Austrians. Just as one can claim the empirical proof of the non-neutrality of money, claiming it would be equally valid empirical evidence on the neutrality of money (Salerno, 2003 pp. 81). Such evidence does not exist, the necessary data can not be interpreted without reference to the idea of neutrality or non neutrality of money, i.e. can not be interpreted independently of what is to be tested.

Discussion

There is general agreement that in the short term changes in the amount of money have real effects. If this is not the case monetary policy would not make sense 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 to the neutrality of money. The point, however, happens in the long run. If money is neutral, then the market converges to the same point of balance that would have gone had there been no changes in the amount of money, so in the long run no matter if the central bank follows a rule or has discretion. In other words, money is a veil that does not affect the long run relative prices; the price level does not matter. The amount of money is not relevant to the structure of market equilibrium (Salerno, 2003 pp. 81).

While any amount of money can be optimal in equilibrium that does not mean that any amount of money that is out of balance. The issue is whether the effects of changing money have an effect during the transition to equilibrium. If changes in the amount of money have an effect on the determinants of equilibrium, then the equilibrium structure is going to be altered and therefore, these changes are not neutral. Changes in the amount of money affect the various economic agents in a disorderly manner. Those who are first in line to receive extra tickets have not yet lost their purchasing power and therefore, may increase their consumption. If no further changes in the amount of money (relative to the demand for money), then these effects begin to fade and the market should converge to the same balance (McCallum, 2009, pp. 95).

This conclusion, however, rests on the implicit assumption that the determinants of equilibrium are constant and unchanged. This, however, it remains an assumption, and as such may be ...