Views
Many economists maintain that money neutrality is a good approximation for how the economy behaves over long periods of time but that in the short run monetary-disequilibrium theory applies, such that the nominal money supply would affect output. One argument is that prices and especially wages are sticky (because of menu costs, etc.), and cannot be adjusted immediately to an unexpected change in the money supply. An alternative explanation for real economic effects of money supply changes is not that people cannot change prices but that they do not realize that it is in their interest to do so. 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 monetary neutrality but a psychological threshold due to money illusion.
The New Keynesian research program in particular emphasizes models in which money is not neutral in the short run, and therefore monetary policy can affect the real economy.
Post-Keynesian economics and monetary circuit theory reject the neutrality of money, instead emphasizing the role that bank lending and credit play in the creation of bank money. Post-Keynesians also emphasize the role that nominal debt plays: since the nominal amount of debt is not in general linked to inflation, inflation erodes the real value of nominal debt, and deflation increases it, causing real economic effects, as in debt-deflation.
Read more about this topic: Neutrality Of Money
Famous quotes containing the word views:
“A foreign minister, I will maintain it, can never be a good man of business if he is not an agreeable man of pleasure too. Half his business is done by the help of his pleasures: his views are carried on, and perhaps best, and most unsuspectedly, at balls, suppers, assemblies, and parties of pleasure; by intrigues with women, and connections insensibly formed with men, at those unguarded hours of amusement.”
—Philip Dormer Stanhope, 4th Earl Chesterfield (1694–1773)
“But of all the views of this law [universal education] none is more important, none more legitimate, than that of rendering the people the safe, as they are the ultimate, guardians of their own liberty.”
—Thomas Jefferson (1743–1826)
“I shall do less whenever I shall believe what I am doing hurts the cause, and I shall do more whenever I shall believe doing more will help the cause. I shall try to correct errors when shown to be errors; and I shall adopt new views so fast as they shall appear to be true views.”
—Abraham Lincoln (1809–1865)