Currency non-neutrality refers to the change of money supply, which causes the adjustment and change of real economic variables such as real interest rate and output level.
Whether money is neutral or not depends on the difference of the influence of the change of money supply on the general price level, real interest rate and output level. If the change of money supply only affects the general price level.
The increase (decrease) of a certain amount of money supply only causes the increase (decrease) of the general price level, so the money is neutral; If the change of money supply causes the adjustment and change of real economic variables such as real interest rate and output level, then money is non-neutral.
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Related background
With the rapid economic development in western countries and the emergence of monetary adjustment, the explanatory role of monetary neutrality theory to the real economy is also declining. Wechsel, a Swedish economist, divides interest rates into monetary interest rates and natural interest rates. Monetary interest rate is the current market loan interest rate, while natural interest rate refers to the expected profit rate of investment.
When the amount of money increases, the interest rate of money is lower than the natural interest rate, so entrepreneurs will expand production and increase output. With the increase of income, expenditure and price, there has been a cumulative process of economic expansion.
Wechsel believes that it is necessary for the government to adopt a certain monetary policy to make the monetary interest rate consistent with the natural interest rate, so as to eliminate the influence of money on the economy.
Currency neutrality is an important issue that has been debated for a long time in theoretical circles. The traditional theory of money quantity holds that the increase or decrease of money quantity will only lead to the change of general price level in the same direction and proportion, but will not lead to the change of actual income level, and money is neutral.
Wechsel first questioned the issue of currency neutrality. He believes that money is neutral only when the bank interest rate is equal to the natural interest rate, otherwise the economy will expand or contract cumulatively, and the money is not neutral.
Hayek believes that money is neutral only when it affects the general price level, not the relative price level, otherwise it will also affect the economic operation, and money is non-neutral.
According to this standard, money in Keynesian theory is non-neutral, because money supply and demand play a very important role in determining whether real income is at full employment level or below employment level.
Patinkin's "actual equilibrium effect" analysis shows that under certain conditions, the change of money stock will cause the general price level to change in the same direction and proportion. That is to say, Patinkin used different analytical methods from the classical quantitative theory and reached the same conclusion of currency neutrality as the classical school.
However, Patinkin's analysis highlights the process analysis of the influence of money on the economy, which is not carried out in the classical quantitative theory. In this process, money affects the operation of the real economy, so it is not neutral.
Keynes really pointed out the great role of money in the economy. Keynes published the General Theory of Employment, Interest and Money in 1936, in which he pointed out that the so-called full employment equilibrium of the "classical" school is only a special case, which is always less than the full employment equilibrium. The fundamental reason for this phenomenon lies in the lack of effective demand (consumption demand and investment demand).
Consumer demand depends on people's propensity to consume, while investment demand depends on people's expectations of economic prospects. To increase investment and consumption, it is necessary to reduce interest rates, which are determined by the supply and demand of money. Therefore, in the view of Keynes and his followers, the role of money is enormous, and money is non-neutral. The state should formulate appropriate fiscal and monetary policies to overcome the economic crisis and depression.
Keynes believed that prices and wages are inelastic and there is no automatic correction mechanism in the economy, so there may be an equilibrium in the economy under the condition of insufficient employment, but this equilibrium is lower than the potential output equilibrium level under the condition of full employment.
Therefore, as long as there are unused resources, the expansion of aggregate demand will increase output, and the fiscal and monetary policies that affect aggregate demand are effective. Therefore, Keynes advocated implementing expansionary fiscal and monetary policies and expanding aggregate demand, thus eliminating unemployment and economic crisis and promoting economic growth.
Baidu encyclopedia-currency neutrality
Baidu Encyclopedia-Currency Non-neutrality