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Money neutrality, super-neutrality, and non-neutrality

Summary:
One way to learn macroeconomics is to figure out when money is neutral, super-neutral, and non-neutral, and when it is not. Money is said to be neutral when a once-and-for-all change in the money supply or money demand has no real effects. Money is super-neutral when a change in the growth rate of the money supply (or demand) has no real effect. And money is non-neutral when a change in the supply or demand for money does have real effects. My new book begins with an examination of money neutrality, then covers money super-neutrality, and then covers money non-neutrality. No macro model is perfect, but the following claims seem like a good approximation of reality: 1. Money is neutral in the long run, but not the short run. 2. Money is approximately super-neutral

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One way to learn macroeconomics is to figure out when money is neutral, super-neutral, and non-neutral, and when it is not.

Money is said to be neutral when a once-and-for-all change in the money supply or money demand has no real effects. Money is super-neutral when a change in the growth rate of the money supply (or demand) has no real effect. And money is non-neutral when a change in the supply or demand for money does have real effects.

My new book begins with an examination of money neutrality, then covers money super-neutrality, and then covers money non-neutrality. No macro model is perfect, but the following claims seem like a good approximation of reality:

1. Money is neutral in the long run, but not the short run.

2. Money is approximately super-neutral in the long run, but not exactly so. This is especially true if there are other distortions such as taxes on nominal investment income.

3. Money is strongly non-neutral in the short run, as monetary shocks affected real wages, real output, employment, real interest rates, real exchange rates, debt defaults, and many other real variables.  The short run can last for years.

With this framework, one can avoid a number of fallacies.  Thus you should be very skeptical of claims that a particular monetary policy is impacting highly persistent structural issues such as income inequality or chronic trade deficits.  But you should also be very skeptical of claims that printing money cannot possibly produce short run benefits, such as recovering more quickly from a recession.

I’m surprised by how many people struggle with the fact that you can’t print your way to prosperity, but you can print your way back to prosperity.

You can think of my new book as an attempt to justify the claims made in this post, and also to flesh out the implications of these claims for recent macroeconomic events in America and elsewhere.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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