| Neutrality Of Money |
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Many economists argue that money neutrality is a good approximation for how the economy behaves over long periods of time, but in the short run, consider it likely that Money might affect Output . One argument is that prices and especially wages are 'sticky', and cannot be adjusted immediately to an unexpected change in the money supply. An alternative explanation for real economic effects from money supply changes is not that people ''can't'' change prices (because of Menu Costs , etc) but that they don't realize that they should. The Bounded Rationality approach suggests that small contractions in the money supply are not taken into account when individuals sell their houses or look for work, and that they will therefore spend longer Searching for a completed contract than without the monetary contraction. Furthermore, the Floor on nominal wages changes imposed by most companies is observed to be Zero ; an arbitrary number by the theory of money's neutrality but a very real Psychological threshold. The New Keynesian research program in particular emphasizes models in which money is not neutral and Monetary Policy can affect the real economy. Superneutrality of money is the inability of changes in the growth rate of the money stock in an economy to affect any variable except the Inflation rate. Money is superneutral rather than neutral when only the ''rate at which the money supply changes'' (as opposed to the ''level of the money supply'') affects the price level. |
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