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MENTAL MODEL · M3502

Monetary Neutrality

Monetary Neutrality
BusinessHigh supportMonetary Economics
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Updated 2026-07-31

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INTRODUCTION

English translation pending.

CORE DEFINITION

A classical proposition in monetary economics, associated with David Hume and formalised through the quantity theory, then restated by Milton Friedman in the natural rate framework. It holds that a change in the money supply eventually changes only nominal variables such as the price level and nominal wages, leaving real variables such as output and employment unchanged. Money is a veil over the real economy, which is determined by technology, preferences, and resources. The claim is explicitly a long-run proposition; short-run non-neutrality arising from sticky prices is widely accepted.

SCAFFOLDING EFFECT

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- Horizon split: Separate the short-run stimulus effect from the long-run price effect before judging policy. - Real-side focus: Direct structural policy at productivity, institutions, and skills rather than at money. - Inflation check: Attribute sustained price growth to money growth rather than to output shifts.

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In the long run, prices and wages adjust fully, so an increase in the money supply raises all nominal values in proportion and leaves relative prices and real quantities where they were. The real economy is pinned down by productive capacity and preferences, not by the quantity of tokens in circulation. Short-run non-neutrality exists because prices and wages are sticky, so adjustment takes time and real effects appear only in the interim.

MINIMUM ACTION

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Neutrality_of_moneyZH · Explicit
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