Neutrality of money

The neutrality of money is a term used in economics theory. The money supply is neutral with respect to the development of overall economic output. The money is like a " veil " over the transactions, but does not affect the relative prices and the real sector of the economy. In order to achieve the objective of price stability, the central bank must make a relatively constant increase in the money supply, which corresponds to the percentage of the expected growth of potential output (so-called potential -oriented monetary policy) and the percentage of increase in prices. According to classical and neoclassical ideas, there is a dichotomy (Greek dichotomy ) between the real and monetary sectors of the economy. Disturbances that occur in the monetary sector, transferred not to the real economic sector. That is, by money supply only affects nominal variables such as price level, but not real variables such as level of production.

Under neoclassical ideas are understood here the analysis of the distribution of goods to the consumer at a given factor quantity and the problem of allocation. In the neo-classic, there is a sharp distinction between the real and the monetary sector. In the real sector of the economy, the relative prices of all goods and factors of production, the production quantities of the various consumer goods and distribution ( allocation) of the factors of production are determined in the production of various goods. In the monetary sector, ultimately, only money prices are set to go from him no ( longer-term ) effects on the real sector of. Influence changes in the nominal money supply in the medium ( long ) period, neither production nor interest rate, only the price level changes. For influencing the economy through monetary measures the changes in the marginal absolute price levels are carried out. This economic " neutrality of money " finds its theoretical explanation in the quantity theory of money. The demand for a neutral money is therefore identical to the demand for a stabilization of the effective money supply in the economy in general. It assumes that money demand and money supply in the economy to match.

Further definition

As a dichotomy between the real and monetary sector is, money is neutral with respect to the real economy as it meets only the medium of exchange function. There the level of real national income and the relative prices of goods and factors is thus determined by real processes. That is, in a proportional increase in nominal prices and wages no real economic changes are produced.

In macroeconomic theory, two essential basic idea is to explain how the change in the nominal money supply affect nominal variables have been developed: The first approach is derived from the theory of real business cycles. The theory of real business cycles is referred to as neo-classical, because of the assumptions of the classical model, in particular monetary and price flexibility - resorting to investigate the causes of short-run aggregate fluctuations. However, the theory of real business cycles is not the only approach to macroeconomics. The term " neo-classical " may also be applied to a number of approaches. It is thus assumed that monetary policy has no effect on real size (output or employment). The neutrality of money is not only the theory of real business cycles her name. It shall at the same time as the most radical feature of this theory. Proponents of this approach believe that wages and prices adjust so that markets are cleared. By adjusting the current prices, the economy is in equilibrium. Wage and Preisinflexibilitäten be considered for the explanation of macroeconomic fluctuations as unimportant. But critics point out that many wages and prices are still inflexible. Due to this inflexibility both the existence of unemployment and the non - neutrality of money can be explained. The theory of real business cycles is viewed with skepticism. The second approach captures essentially the Keynesian macroeconomic models provenance (origin, descent, origin). A completely different approach to the analysis of macroeconomics assumes that the price level is not completely flexible, rather short-term constant. This basis for macroeconomics is often called Keynesian assumption. The market-clearing function of the prices, which is a focal point for the classic approach, so that no longer exists. Instead, the adaptation on the quantities demanded and produced goods and thus the adjustment on output and employment. Under the Keynesian assumption of Keynesianism output is determined by demand. Providers produce as much as is demanded at any given price level. The Keynesian case can be regarded as contrary to the classical case. Real wages ( real wages ) If all nominal prices and nominal wages are rigid, so remain fixed. If output is less demand than production, as occurs unemployment. The money market is adjusted faster than the labor market equilibrium. The Keynesian approach is characterized by a relationship between the " real economy " of goods and services and the " symbol economy " of money and credit.

Neutrality of money by Knut Wicksell

The Neoclassical economist Knut Wicksell introduced the term " neutrality of money " in monetary theory. He created the terms " neutral " and " stable value " Money and defined the terminus of the neutral money through a derivation from the ratio of money interest and natural interest. Ihmzufolge is the interest on money then neutral if its value matches the level of the natural rate. Under natural interest Wicksell understood the interest rate equal to the real return of capital in production. This interest thus allows the price level stability. The brainchild of Wicksell concept of neutral money, was picked up by some theorists, such as Carl Menger ( "internal exchange value of money" ) and Karl Helfferich ( " indifferent money "). However, under other theorists, his theory found no significant appeal or was even rejected. So David Davidson rose early on the objection that Wicksell did the changes on the economic side goods and in particular the technical productivity is not taken into account in his book "money interest rate and commodity prices ." Davidson argues that an increase in productivity can increase the earnings outlook, as long as commodity prices remained unchanged. Therefore, according to Davidson, the natural (real ) interest against the interest of money had become too high. However, money and economic theorists deal until the end of the 1920s and later in -depth manner with Wicksell's theses on the neutrality of money.

Neutrality of money by Friedrich von Hayek

One of the most common definitions of monetary neutrality goes to Friedrich von Hayek (1933 ) back: "A benefit is then neutral, if monetary sphere does not affect the property sphere. " Be first to Nicolas Hayek turned to this mixing of neutrality of money and value stability of the money. From Hayek's concept assumes that a precondition for neutral money must be fulfilled to a distortion of relative prices - to prevent possible - goods prices, wages and interest rates. In the view of Hayek 's only neutral money the security of a stable, without cyclical fluctuations of the economic process. In such a system, the interest rate and the natural interest rate are identical, so the money is neutral with respect to the prices of goods. In the center of his analysis focuses on the influence of money on aggregate flow. Hayek argues that the control of the money supply by the central bank comes as a possible viable measure for neutrality of money in question. In 1943, he regarded the goods reserve currency as a stabilizing, automatically operating mechanism as well as the government's monopoly on note issue. It represents the effect of the money that a pure metal currency like gold guarantee the neutral money and monetary policy would have no monetary effects in the real sector. 1977 replaced by Hayek that goal then, not to keep the money supply, but the " average of the prices of primary factors of production " constant in order to achieve the broadest possible approach to the model of neutral money. According to Hayek have to at least the following conditions must be met:

1 Quantitative Neutrality: The money supply has no effect on the real variables of the economy.

2nd time neutrality: Money has no influence on the individual time preferences of economic agents.

3 distribution neutrality: Money itself has no effect on the primary distribution of national income.

Neutrality of money by John M. Keynes

The modern theory of money demand substantiated John M. Keynes. The in Cambridge, England, born 1883 son of an economics professor designed with the help of other economists, his main work on the " General Theory of Employment, Interest and Money" and published it in 1936. According to him, run flexible prices and wages do not automatically lead to full employment.

Keynes showed that underemployment production and employment in an economy through the demand for goods is limited, while their stressed by the dominant theory limit applies through the available resources and their efficient application only at full employment. For the determination of the demand for goods, the circuit relationships are central, and for investment decisions, the uncertainty of the future and expectations play a much larger role than in the classical theory assumed. In addition, the monetary and fiscal policy to be given a high priority. This " Keynesian Revolution " met with great response worldwide, varying from enthusiastic approval and rugged rejection and certain for decades the discussion of macroeconomic issues.

The Keynesian money demand theory

Keynes distinguishes three motives for money demand, where he ran out of a strict separation of the influencing factors of individual sub money demand functions:

1 The revenue motive as money demand for the financing of the transaction means, the need for money for sales purposes by the volume of transactions is dependent.

The second caution motive as money demand to protect against the risk of illiquidity, since the consumer with regard to any statement of receipts and payments of the amount and time can do.

3 The speculative motive than money demand in the financial sector.

The post-Keynesian theory of money demand

An extension of the Keynesian theory of Keynes was made by James Tobin and William Baumol, since the person responsible for the blurring of boundaries between transaction balances and speculative cash factor, the rate of interest, in both partial demands, namely the speculation fund and the transaction balances, is received.

Reference to the AS / AD model

The neoclassical claim that falling prices and wages led to higher employment, is often derived by means of the AS / AD model and represented by a rising aggregate supply curve and a falling aggregate demand curve.

The graph can be derived consequently, that at a lower demand relative to supply a reduction in the price level is sufficient for both curves come to compensate for higher production.

The short-run equilibrium is at the intersection of the two functions, ie, at point A, because here are all markets in the AS- AD equilibrium. At point B, the aggregate supply curve is, because it is: and.

Criticism

Money is after Karl Marx and Keynes from the beginning a necessary part of the capitalist economic system and thus also relevant for the production sphere - it is after the monetary and credit theory of Marx and Keynes also anything but neutral.