Neutrality of money is the idea that a change in the stock of money affects only nominal variables in the economy such as prices , wages, and exchange rates , with no effect on real variables, like employment, real GDP , and real consumption . Neutrality of money is an important idea in classical economics and is related to the classical dichotomy . It implies that the central bank does not affect the real economy (e.g., the number of jobs , the size of real GDP, the amount of real investment) by creating money. Instead, any increase in the supply of money would be offset by a proportional rise in prices and wages. This assumption underlies some mainstream macroeconomic models (e.g., real business cycle models). Others like monetarism view money as being neutral only in the long run.
28-549: NNS can stand for: New neoclassical synthesis (economics) NASCAR Nationwide Series (previous name of the NASCAR Xfinity Series ) Nashville Number System (music) National Numeracy Strategy (UK education) Near Net Shape Nearest neighbor search Nearly-new sale Newport News Shipbuilding , a shipyard Nigerian Navy Ship Nippon Television Network System Non-Nutritive Sweetener, i.e.
56-447: A Sugar substitute Topics referred to by the same term [REDACTED] This disambiguation page lists articles associated with the title NNS . If an internal link led you here, you may wish to change the link to point directly to the intended article. Retrieved from " https://en.wikipedia.org/w/index.php?title=NNS&oldid=942888456 " Category : Disambiguation pages Hidden categories: Short description
84-406: A consensus view on the best way to explain short-run fluctuations in the economy. This new synthesis is analogous to the neoclassical synthesis that combined neoclassical economics with Keynesian macroeconomics . The new synthesis provides the theoretical foundation for much of contemporary mainstream macroeconomics. It is an important part of the theoretical foundation for the work done by
112-400: A series of short-run Phillips curves and a long-run one, where the short-run curves were supposed to be the conventional, negatively sloped curves, while the long-run curve was actually a vertical line indicating the natural rate of unemployment . According to Friedman, money was not neutral in the short run, because economic agents, confused by the money illusion , always respond to changes in
140-439: Is characterised by a consensus on acceptable methodology, the importance of empirical validation of theoretical work, and the effectiveness of monetary policy. Ellen McGrattan proposed a list of four elements that are central to the new synthesis described by Goodfried and King: intertemporal optimization, rational expectations, imperfect competition, and costly price adjustment (menu costs). Goodfriend and King also find that
168-485: Is different from Wikidata All article disambiguation pages All disambiguation pages New neoclassical synthesis Heterodox The new neoclassical synthesis ( NNS ), which is occasionally referred as the New Consensus , is the fusion of the major, modern macroeconomic schools of thought – new classical macroeconomics / real business cycle theory and early New Keynesian economics – into
196-476: Is neutral, so that the level of the money supply at any time has no influence on real magnitudes, money could still be non-superneutral: the growth rate of the money supply could affect real variables. A rise in the monetary growth rate, and the resulting rise in the inflation rate, lead to a decline in the real return on narrowly defined (zero-nominal-interest-bearing) money. Therefore, people choose to re-allocate their asset holdings away from money (that is, there
224-459: Is no information available in advance about the shocks to eliminate. Under these conditions, the central bank is unable to plan a course of action, that is, a countercyclical monetary policy. Rational agents can be conceited only by unexpected changes, so a well-known economic policy is completely in vain. However, and this is the point, the central bank cannot outline unforeseeable interventions in advance, because it has no informational advantage over
252-408: 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,
280-566: Is partly a victory for the new classical, but it also includes the Keynesian desire for modeling short-run aggregate dynamics. Second, the modern synthesis recognizes the importance of using observed data, but economists now focus on models built out of theory instead of looking at more generic correlations. Third, the new synthesis addresses the Lucas critique and uses rational expectations. However, based on sticky prices and other rigidities,
308-400: Is the ultimate purpose of the central bank when changing the money supply? For example, and mostly: exerting countercyclical control. Doing so, monetary policy would increase the money supply in order to eliminate the negative effects of an unfavourable macroeconomic shock. However, monetary policy is not able to utilize the trade-off between inflation and real economic performance, because there
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#1732782361063336-519: The Federal Reserve and many other central banks . Prior to the synthesis, macroeconomics was split between partial-equilibrium New Keynesian work on market imperfections demonstrated with small models and new classical work on real business cycle theory that used fully specified general equilibrium models and used changes in technology to explain fluctuations in economic output. The new synthesis has taken elements from both schools, and
364-479: 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 . Neutrality of money has been a central question for monetarism . The most important answers were elaborated within the framework of the Phillips curve . Milton Friedman , assuming adaptive expectations , distinguished
392-581: The Philips curve that draws from Keynesianism. General Neutrality of money When neutrality of money coincides with zero population growth, the economy is said to rest in steady-state equilibrium . Superneutrality of money is a stronger property than neutrality of money. It holds that not only is the real economy unaffected by the level of the money supply but also that the rate of money supply growth has no effect on real variables. In this case, nominal wages and prices remain proportional to
420-514: The Phillips curve exists without existing . It has been a heritage that there is a trade-off between inflation and unemployment or real economic performance, so it is undoubted that there is a short run Phillips curve (or there are short run Phillips curves). Although there are fewer possible actions available for the monetary policy to conceit people in order to increase the labour supply, unexpected changes can always trigger real changes. But what
448-406: The agents. The central bank has no information about what to eliminiate through countercyclical actions . The trade-off between inflation and unemployment exists, but it cannot be utilized by the monetary policy for countercyclical purposes. 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
476-474: The consensus models produce certain policy implications. In contradiction with some new classical thought, monetary policy can affect real output in the short-run, but there is no long-run trade-off: money is not neutral in the short-run but it is in the long-run. High inflation and fluctuations in the inflation rate, have negative welfare effects. It is important for central banks to maintain credibility through rules based policy like inflation targeting. In
504-477: The difference between measured output and an ever-growing trend of output capacity . Real business cycle theory did not consider the possibility of gaps and used changes in efficient output, caused by shocks to the economy, to explain fluctuations in output. Keynesians rejected this theory and argued that changes in efficient output were not large enough to explain wider swings in the economy. The new synthesis combines elements from both schools on this issue. In
532-423: 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
560-409: The general framework in which the mechanisms underlying the Phillips curve could be scrutinized. The purpose of the first Lucasian island model (1972) was to establish a framework to support the understanding of the nature of the relationship between inflation and real economic performance by assuming that this relation offers no trade-off exploitable by economic policy. Lucas' intention was to prove that
588-406: The late 2000s, Michael Woodford attempted to describe the new synthesis with five elements. First, he stated that there is now agreement on intertemporal general equilibrium foundations. These allow both short-run and long-run impacts of changes in the economy to be examined in a single framework and microeconomic and macroeconomic concerns are no longer separated. This element of the synthesis
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#1732782361063616-495: The money supply. If the monetary authority chooses to increase the stock of money and, hence, the price level, agents will be never able to distinguish real and nominal changes, so they will regard the increase in nominal wages as real modifications, so labour supply will also be boosted. However, this change is only temporary, since agents will soon realize the actual state of affairs. As the higher wages were accompanied by higher prices, no real changes in income occurred, that is, it
644-459: The new synthesis, output gaps exist, but they are the difference between actual output and efficient output. The use of efficient output recognizes that potential output does not grow continuously, but can move upward or downward in response to shocks. Fifth, it is accepted that central banks can control inflation through the use of monetary policy. This is partly a victory for monetarists, but new synthesis models also include an updated version of
672-438: The nominal money supply not only in response to one-time permanent changes in the nominal money supply but also in response to permanent changes in the growth rate of the nominal money supply. Typically superneutrality is addressed in the context of long-run models. According to Don Patinkin , the concept of monetary neutrality goes back as far as David Hume . The term itself was first used by continental economists beginning at
700-493: 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 . Even if money
728-421: The synthesis does not embrace the complete neutrality of money proposed by earlier new classical economists. Fourth, the new synthesis accepts that shocks of varying types can cause economic output to fluctuate. This view goes beyond the monetarist view that monetary variables cause fluctuations and the Keynesian view that supply is stable while demand fluctuates. Older Keynesian models measured output gaps as
756-457: The turn of the 20th century, and exploded as a special topic in the English language economic literature upon Friedrich Hayek 's introduction of the term and concept in his famous 1931 LSE lectures published as Prices and Production. Keynes rejected neutrality of money both in the short term and in the long term. Many economists maintain that money neutrality is a good approximation for how
784-418: Was no need to increase the labour supply. In the end, the economy, after this short detour, will return to the starting point, or in other words, to the natural rate of unemployment. New classical macroeconomics , led by Robert E. Lucas , also has its own Phillips curve. However, things are far more complicated in these models, since rational expectations were presumed. For Lucas, the islands model made up
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