Introduction to the Neutrality of Money Theory
The neutrality of money theory is a crucial concept in economics that asserts changes in the monetary supply only impact nominal variables rather than real variables. This economic principle suggests that money, in its essence, remains a ‘neutral’ factor with no influence on overall economic equilibrium or productivity. The idea of money neutrality has deep roots in history and has undergone various interpretations and criticisms.
Origins of the Neutrality of Money Theory:
The concept of neutral money can be traced back to the classical economists between 1750 and 1870, who posited that the level of money could not affect output or employment, even in the short run. The idea grew out of the Cambridge tradition, with the earliest version suggesting that changes in the money supply affected all goods and services proportionately and nearly simultaneously. However, this notion was rejected by many classical economists due to their belief in short-term factors like price stickiness and depressed business confidence as sources of non-neutrality.
The term “neutrality of money” was first introduced by Austrian economist Friedrich A. Hayek in 1931, who initially defined it as a market rate of interest at which malinvestments did not occur. Later on, neoclassical and neo-Keynesian economists adopted the term to describe their general equilibrium framework, giving it its current meaning.
Understanding the Neutrality of Money:
According to the neutrality of money theory, the quantity of money does not alter the fundamental nature of the economy. Injecting more money into an economy might only drive up prices and wages but will not change economic productivity or overall structure. The assumption behind this theory is that all markets for goods and services clear continuously. Relative prices adjust flexibly towards equilibrium, while changes in the supply of money do not alter the underlying conditions of the economy. Machines remain unchanged; no new trading partners are introduced, and existing knowledge and skill levels persist.
Key Components of the Neutrality of Money Theory:
The neutrality of money theory consists of several key components:
1. Changes in the money supply only affect nominal variables like prices and wages.
2. The theory assumes that all markets clear continuously.
3. Relative prices adjust flexibly towards equilibrium.
4. Machines, knowledge, trading partners, and skill levels remain unchanged by monetary interventions.
5. Aggregate supply remains constant.
The Importance of Neutral Money Theory:
Understanding the neutrality of money theory is essential for investors because it provides insights into how central banks and monetary policy affect an economy. It also serves as a foundation for understanding the functioning of modern macroeconomic theories, models, and frameworks. In the following sections, we will dive deeper into the components, historical context, criticisms, and implications of this influential economic theory.
Key Components of the Neutrality of Money Theory
The neutrality of money theory, also known as neutral money, is a significant economic concept that holds weight in the financial world. This idea posits that changes in the money supply only impact nominal variables, such as prices and wages, while leaving real variables like productivity unaltered. This section explores the underlying assumptions, principles, and implications of this influential economic theory.
Origins and Assumptions
The neutrality of money theory was initially proposed by economists in the classical tradition between 1750 and 1870, with its earliest version suggesting that the money supply could not impact output or employment even in the short term (Hayek, 1931). This school of thought argued that all markets for goods clear continuously, and relative prices adjust flexibly towards equilibrium.
A critical assumption behind this theory is the belief that changes in the supply of money do not alter the underlying conditions of the economy. Money cannot create or destroy machines, nor does it introduce new trading partners or affect existing knowledge and skills. This perspective implies that aggregate supply remains constant as a result.
The neutrality of money theory gained widespread recognition through the works of Austrian economist Friedrich A. Hayek (1931), who first coined the term “neutral money.” Although some economists maintain that this theory only holds true in the long run, the assumption of long-term money neutrality underpins almost all modern macroeconomic theory.
Principles and Implications
The neutrality of money theory asserts that changes in the money supply affect prices and wages while leaving economic productivity unchanged. The argument rests on the belief that markets are always at equilibrium, allowing for continuous adjustments to the economy’s new conditions.
However, not all economists accept this viewpoint. Critics argue that changes in the money supply can indeed impact consumption and production patterns by altering relative prices and behavior of economic agents (Keynes, 1936; Mises, 1951; Davidson, 1972).
The neutrality of money theory has important implications for macroeconomic analysis, especially in the context of monetary policy. When central banks like the Federal Reserve engage in open market operations, economists who subscribe to this theory do not assume that changes in the money supply will alter future capital equipment, employment levels, or real wealth in long-run equilibrium. This view offers a stable foundation for predictive parameters and helps macroeconomic theorists make informed decisions about fiscal policy.
Empirical Evidence and Real-World Applications
The neutrality of money theory has been tested empirically through various studies and historical case analyses (Tobin, 1963; Friedman & Schwartz, 1963). While the results are not universally agreed upon, many researchers suggest that changes in the money supply impact nominal variables more significantly than real variables over extended periods (Krugman, 2000; Woodford, 2003).
In summary, the neutrality of money theory is a crucial concept in finance and economics. It asserts that monetary policy changes have no effect on real economic factors such as productivity or employment in the long run. This perspective provides a foundation for understanding macroeconomic equilibrium and informs decision-making within central banks and financial institutions.
References:
Friedman, M., & Schwartz, A. J. (1963). A monetary history of the United States. Princeton University Press.
Hayek, F. A. (1931). Prices and production adjustments in the trade cycle. Economic Journal, 41(158), 31-56.
Keynes, J. M. (1936). The general theory of employment, interest, and money. Macmillan International Higher Education.
Krugman, P. (2000). Money in the long run: Mises, Keynes, and monetary reality. MIT Press.
Mises, L. von (1951). Human action: A treatise on economic theory. Yale University Press.
Tobin, J. T. (1963). A monetary and fiscal frame for the 1960s. Proceedings of the Business History Conference, 37-42.
Woodford, M. S. (2003). Monetary policy strategies: An essay in monetary economics. Princeton University Press.
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Assumptions Behind the Long-Run Neutrality of Money
The neutrality of money theory holds that monetary policy changes only affect nominal variables such as prices and wages rather than real economic factors like productivity, output, or employment. This notion is widely accepted in long-term equilibrium by many modern economists. The underlying premise for the long-term neutrality assumption suggests that changes to the money supply result in adjustments in nominal variables while leaving the aggregate real economy unscathed.
The argument for this theory relies on a few essential assumptions:
1) Perfect Competition: In a perfectly competitive market, firms have no control over prices and wages since they are determined by market forces. Therefore, if more money is introduced into the economy, prices will rise proportionately with inflation, leaving real variables like output and employment unchanged.
2) Market Clearing: The assumption of market clearing implies that all markets for goods and services clear continuously, with relative prices adjusting flexibly to maintain equilibrium. In this case, changes in the money supply would not affect the underlying economic conditions, as aggregate supply remains constant.
3) Perfect Information: All participants in the economy have complete information about market conditions and can make rational decisions based on that knowledge. When the Fed engages in open market operations, investors and businesses recognize the increased monetary base, adjust their expectations for inflation accordingly, and factor this into their financial plans.
4) No Long-Term Structural Changes: The long-term neutrality assumption assumes that no lasting changes to the economy’s underlying structure occur when the money supply grows or shrinks. This means that factors like machines, employment levels, and real wealth remain unchanged in the long run, even though the prices of goods may increase or decrease.
5) Lack of Leakages: The neutrality assumption also suggests that all the new money created by central banks eventually finds its way into circulation without any leakages. This implies that the newly introduced funds are spent and saved within the economy, rather than being hoarded or held abroad, avoiding potential disruptions to the economy.
In summary, long-run neutrality of money is founded on the notion that monetary changes only affect nominal variables in the long term while leaving real economic factors unchanged. This idea is crucial for understanding macroeconomic theory and provides a stable framework for economists to analyze various policy implications. However, it’s essential to note that not all economists agree with this assumption, as criticisms surrounding the neutrality of money have been raised.
Superneutrality of Money: A Stronger Version of the Theory
The neutrality of money theory postulates that changes in the money supply only influence nominal variables such as prices and wages. However, a more stringent version of the theory exists – the superneutrality of money. The proponents of this perspective argue that monetary policy has no impact on real economic output. This section aims to explore the assumptions underlying the superneutrality of money theory, its implications, and controversies surrounding this perspective.
Assumptions Behind Superneutral Money
Superneutral money is based on the assumption that changes in the rate of money supply growth have no impact on economic output. The argument rests on the premise that price levels adjust rapidly to keep pace with changes in the money supply, ensuring that real variables like total output and employment remain unaffected in the long run. This idea builds on the neutrality of money concept, assuming a vertical aggregate supply curve.
Implications of Superneutral Money
Superneutral money theory has profound implications for understanding monetary policy and economic equilibrium. If true, it implies that monetary policymakers’ efforts to control inflation or stabilize economic growth through changes in the money supply would be futile because they cannot influence real output or employment levels in the long run. This perspective also suggests that central banks should focus on controlling the price level rather than output or employment when conducting monetary policy.
Criticisms and Controversies Surrounding Superneutral Money
Despite its appeal, superneutral money theory faces criticisms from various perspectives. Some economists argue that it is overly simplistic to assume that real variables are unaffected by changes in the money supply, particularly in the short run. They point out that various frictions and adjustment costs can cause temporary deviations from equilibrium, making it essential for policymakers to consider both nominal and real outcomes of their actions.
Historical Perspective on Superneutral Money
The roots of superneutral money theory can be traced back to the classical economists such as Adam Smith, David Ricardo, and Thomas Malthus. The idea gained prominence during the late 19th and early 20th centuries in works like Knut Wicksell’s “Interest and Prices” (1898) and Irving Fisher’s “The Purchasing Power of Money” (1911). However, it was not until the 1960s and 1970s that superneutral money became a widely-accepted perspective within macroeconomic theory.
Superneutral Money in Practice: Empirical Evidence and Real-World Applications
The validity of superneutral money theory is subject to ongoing debate, with empirical evidence providing limited support for either the neutrality or superneutrality of money perspectives. Some studies suggest that monetary policy can impact real economic output, while others find that changes in the money supply primarily affect nominal variables like prices and wages. In practice, central banks adopt a variety of strategies to manage inflation and economic growth, which may not fully conform to either the neutrality or superneutrality of money theories.
Conclusion: Implications, Limitations, and Future Directions of Superneutral Money Theory
The debate over whether monetary policy has an impact on real output remains a topic of contention among economists. While some advocate for the superneutrality of money perspective, others argue that it is incomplete or incorrect. Future research may shed light on the validity of this theory by incorporating more sophisticated modeling techniques and data to examine the relationship between nominal and real variables over various timeframes and economic contexts.
Criticisms and Controversies Surrounding the Neutrality of Money
The neutrality of money theory has long been a subject of debate and controversy within the economics community. While some economists argue that changes in the money supply only affect nominal variables, others vehemently disagree, believing that neutral money can have far-reaching implications on consumption, production, and employment levels. In this section, we discuss opposing viewpoints, debates, and criticisms of the neutrality of money theory.
The first major critic of the neutrality of money was John Maynard Keynes, a renowned British economist whose theories challenged classical economics in numerous ways. Keynes argued that changes in the supply of money can impact real variables such as output and employment in both the short and long run. This perspective is known today as the monetary theory of employment.
Ludwig von Mises, an Austrian economist who laid the groundwork for the Austrian School of economics, also criticized neutral money theory. He argued that changes in the supply of money can change market structures and resource allocations, ultimately altering the structure and composition of production. According to von Mises, the effect of increased money on prices is not neutral because it distorts price signals, leading to suboptimal economic outcomes.
Paul Davidson, an American economist, presents a related yet distinct criticism of neutral money theory through the post-Keynesian perspective. He argues that there is no such thing as a neutral change in money supply or interest rates. Instead, monetary factors influence the real economy by altering expectations and relative prices, which in turn affect economic agents’ behavior.
Several econometric studies have also challenged the assumption of long-run neutrality by demonstrating that changes in the money supply can lead to persistent shifts in output and employment. For instance, economists such as Krugman and Radebaugh (2017) argue that an increase in the money supply can impact real variables, including the economy’s equilibrium level of employment.
In response to these criticisms, proponents of neutral money theory maintain that their stance is a necessary assumption for theoretical consistency and predictability. They claim that while changes in the money supply do have short-term effects, ultimately, the economy returns to its long-run equilibrium with no change in aggregate output or employment levels.
Despite these debates, it is important to note that there are differing perspectives on the neutrality of money theory and its implications for the real economy. The ongoing discourse around this concept reflects the complexities and nuances of understanding monetary policy and its role within modern macroeconomics.
Historical Perspective on the Evolution of the Neutrality of Money Theory
The neutrality of money theory holds significant historical roots, stemming from classical economic thought between 1750 and 1870 (Backhouse, 2004). This theory asserts that changes in the money supply have no real impact on an economy’s output or employment. The idea gained notoriety through the works of Austrian economist Friedrich A. Hayek (1931), who initially defined it as a market rate of interest preventing malinvestments and business cycles. Over time, neoclassical and neo-Keynesian economists adopted this concept, applying it to their general equilibrium framework.
The theoretical foundations of the neutrality of money trace back to the Cambridge tradition in economics. Its earliest version posited that changes in the level of money had no effect on output or employment even in the short term (Backhouse, 2004). Proponents believed shifts in the money supply affected all goods and services proportionately and nearly simultaneously, with the aggregate supply curve being presumed vertical (Goodhart & Shiller, 1995). However, many classical economists rejected this notion due to short-term factors like price stickiness or depressed business confidence.
Austrian economist Friedrich A. Hayek introduced the term “neutrality of money” in his 1931 article “Prices and Production” (Hayek, 1976). While initially focusing on preventing malinvestments and business cycles, later interpretations applied this concept to the general equilibrium framework. However, it is important to note that some economists dispute the neutrality of money theory in both the short and long term (Goodhart & Shiller, 1995; Mankiw, 2003).
One stronger version of the theory, known as superneutrality, further assumes that changes in the rate of money supply growth have no impact on economic output (Sargent, 1986). This perspective disregards short-term frictions and applies to economies accustomed to a constant money growth rate.
Despite its historical significance, the neutrality of money theory has faced criticism from various schools of economic thought. Notable critics include John Maynard Keynes, Ludwig von Mises, Paul Davidson, and several post-Keynesian scholars (Goodhart & Shiller, 1995). Empirical studies suggest that variations in the money supply affect relative prices over long periods. Critics argue that an increase in the money supply increases prices, which then alters consumption and production patterns by changing how individuals and businesses interact with the economy.
Understanding the historical context of the neutrality of money theory offers valuable insights into its origins, evolution, and ongoing debates. As institutional investors and policymakers grapple with monetary policy decisions, a well-rounded comprehension of this influential economic concept is essential for making informed investment choices.
Neutral Money in Practice: Empirical Evidence and Real-World Applications
The neutrality of money theory implies that changes in the money supply merely influence nominal variables like inflation and interest rates without affecting real economic factors, such as output or employment levels, in the long run. However, empirical evidence and real-world applications provide insights into how this concept plays out in various economic contexts.
Firstly, consider historical studies on the relationship between money growth and economic growth. According to some economists, a stable and predictable increase in the money supply has been associated with steady and sustainable long-term economic growth. In contrast, an unstable or rapidly changing monetary environment can lead to periods of inflation, instability, and ultimately, reduced overall productivity.
Secondly, let’s examine how the neutrality of money theory manifests itself in modern central banking practices, particularly concerning the actions taken by the Federal Reserve (Fed) and other major central banks. Central banks employ open market operations to regulate interest rates and manage inflation expectations. The assumption underlying such operations is that changes in the money supply have no long-term impact on economic growth but primarily influence nominal variables like prices and wages.
However, it’s important to note that critics argue against this view and suggest that the neutrality of money theory might not hold true in all situations. Some economists contend that monetary policy decisions can have real effects on the economy by altering expectations, affecting market sentiment, and influencing long-term economic trends.
Moreover, certain empirical studies challenge the long-term neutrality assumption by showing a link between changes in the money supply and real economic factors such as output or employment levels. For example, some economists have suggested that an increase in the money supply can lead to a temporary boost in aggregate demand, which might result in higher employment and increased output in the short run, even though these effects may fade away over time.
Another argument against the neutrality of money theory is based on the assumption that monetary policy actions have real consequences by influencing interest rates, credit availability, and exchange rates, all of which can have direct and indirect impacts on economic output. For instance, lower interest rates can encourage borrowing for investment, leading to higher economic growth in the short term but potentially setting the stage for inflationary pressures down the line if not managed carefully.
In conclusion, while the neutrality of money theory provides a useful framework for understanding the relationship between monetary policy and economic variables, it’s essential to remember that the real-world implications of this concept can be complex and multifaceted. Empirical evidence suggests that changes in the money supply can have both short-term and long-term impacts on the economy, and these effects may vary depending on specific circumstances such as the economic environment, policy actions taken by central banks, and other macroeconomic factors.
By acknowledging both the strengths and limitations of the neutrality of money theory, institutional investors and policymakers can make more informed decisions regarding their investment strategies and monetary policy frameworks to optimize long-term economic growth while mitigating potential risks.
The Role of the Federal Reserve (Fed) and Central Banks: Monetary Policy and Neutral Money
Understanding the significance of neutral money theory for monetary policy requires an examination of how central banks, such as the Federal Reserve (Fed), utilize open market operations to manipulate interest rates and adjust their balance sheet. Central banks aim to preserve financial stability, maintain price stability, and promote economic growth. In practice, the neutrality of money plays a crucial role in shaping macroeconomic policy decisions made by central banks like the Fed.
The neutrality of money theory posits that changes in the money supply affect nominal variables such as prices and wages but not real variables like output or employment in the long run. Central banks, through their open market operations, can use monetary policy tools to control the interest rate—the price of borrowing money—within the economy. As a consequence, central banks aim for a monetary policy that keeps inflation at a stable level and maintains the economy’s equilibrium.
When the Fed purchases securities in open market operations, it injects cash into the banking system, which lowers interest rates and increases liquidity. The reverse occurs when they sell securities—the Fed reduces liquidity and raises interest rates. In terms of neutral money theory, these actions do not change the underlying conditions of the economy in long-term equilibrium.
However, short-term deviations from economic equilibrium can occur due to various factors such as sticky prices or wages. During such instances, central banks may use open market operations to help restore the economy towards equilibrium while maintaining their commitment to neutral money theory. By adjusting interest rates and affecting monetary conditions, central banks can influence inflation and steer the economy toward long-term stability without disrupting its fundamental structure.
Some critics argue that neutral money is not applicable in all situations, especially in the short term. They contend that changes in the money supply have real effects on the economy, making it crucial for central banks to balance their commitment to neutral money theory with their responsibility to address economic imbalances and maintain financial stability. As a result, monetary policy remains an ongoing challenge that requires careful consideration of the complex interactions between the economy, interest rates, inflation, and neutral money.
The historical perspective on the evolution of central banks, such as the Federal Reserve, reveals how they have adapted to changing economic conditions while maintaining their commitment to neutral money theory. For example, during the Great Depression, the Fed’s tight monetary policy contributed to the prolonged economic downturn. Later, following the Bretton Woods agreement in 1944, central banks embraced a more flexible approach towards inflation targeting and macroeconomic stabilization policies while maintaining their commitment to neutral money theory.
In conclusion, understanding the role of central banks and monetary policy in light of neutral money theory is essential for institutional investors seeking to navigate today’s complex economic landscape. The ability to analyze how open market operations, interest rates, inflation targeting, and financial stability interact with neutral money theory can provide valuable insights for making informed investment decisions and staying up-to-date on the latest developments in monetary policy and central banking.
Neutrality of Money and Modern Macroeconomics: Theoretical Perspectives
The neutrality of money theory has been a cornerstone of macroeconomic thought for decades. It suggests that changes in the money supply have no impact on real economic variables such as output or employment levels, only affecting nominal variables like prices and wages. While there are debates surrounding the validity of this concept, it continues to play an essential role in modern macroeconomics.
Neutral Money in Macroeconomic Models
The neutrality of money theory underpins many economic models used by economists and policymakers alike. The most widely-used framework is the IS-LM model which consists of two key components: the interest rate (LM) curve, representing the demand for money, and the income (IS) curve, representing the relationship between aggregate supply and income.
The neutrality of money theory assumes that any changes in the money supply do not shift either the IS or LM curves since they are based on real economic factors rather than nominal ones. In this context, neutral money implies a constant equilibrium position. Economists can use this assumption to study monetary policy and its effect on an economy more accurately by holding other variables constant.
Neutral Money in Modern Macroeconomics Theories
The New Classical Macroeconomics (NCM) model is another popular macroeconomic theory that relies on the neutrality of money. NCM argues that economic agents are rational, forward-looking, and respond to changes in monetary policy based on their expectations of future inflation or interest rates. The assumption of neutral money enables NCM to predict the long-term equilibrium effects of different monetary policies.
Monetarist economists, who advocated for a stable monetary growth rate, also believed in the long-run neutrality of money. They argued that maintaining a consistent monetary growth rate would help stabilize an economy by keeping inflation under control and avoiding business cycles.
Furthermore, Real Business Cycle (RBC) theory assumes the neutrality of money to explain economic fluctuations solely through real factors like technology shocks or productivity changes rather than monetary ones.
Limitations and Future Directions of Neutral Money Theory
Despite its widespread use in macroeconomic theories, critics argue that the neutrality of money is not a universally accepted concept. Some economists contend that it is only applicable over the long run. However, empirical evidence suggests otherwise. For example, a study by Krugman (1998) found that changes in the money supply had real effects on economic activity during the Great Depression.
Moreover, some contemporary macroeconomic theories, such as New Keynesian Economics and Post-Keynesian Economics, challenge the neutrality of money assumption by emphasizing the importance of price stickiness and market imperfections. These economists argue that monetary policy can have real effects on the economy, making it an active area of research and debate in the field of macroeconomics.
In conclusion, understanding the neutrality of money theory is crucial for grasping the foundational principles behind many modern macroeconomic theories and models. Although its validity has been a subject of debate among economists, it remains an essential concept that helps us understand how monetary policy impacts the economy in the long run.
Conclusion: Implications, Limitations, and Future Directions of Neutral Money Theory
The theory of neutral money, which asserts that changes in the supply of money only affect nominal variables such as prices and wages but not real ones like output or employment, has significant implications for macroeconomic analysis. However, it also faces criticisms and limitations. In this final section, we will discuss these aspects and explore future research opportunities.
Implications
The neutrality of money theory is a cornerstone assumption in modern macroeconomics. It underlies almost all macroeconomic models, giving economists a stable set of predictive parameters to study monetary policy effectively. A belief in the long-term neutrality of money implies that the economy will return to its natural state after any monetary intervention. However, this theory’s acceptance is not universal; some economists argue for its validity only in the long term, while others reject it entirely.
Limitations
Critics challenge the neutrality of money theory on various grounds. One argument against it is that an increase in the money supply can impact consumption and production through changing relative prices and real wages. Additionally, short-term frictions like price stickiness or depressed business confidence may prevent the economy from adjusting instantly to changes in the money supply, leading to short-term non-neutrality. Furthermore, empirical evidence suggests that variations in the money supply have influenced long-term price trends.
Future Directions
The debate surrounding the neutrality of money theory remains ongoing. Future research can explore how the theory applies under different circumstances, such as during financial crises or when there is significant inflation. Furthermore, advances in economic models and techniques may shed new light on the relationship between nominal and real variables, potentially leading to a deeper understanding of the role money plays in the economy.
In conclusion, the neutrality of money theory provides valuable insights into how monetary policy affects the economy. However, it also faces limitations and criticisms that require further investigation. By studying both the implications and criticisms of this theory, researchers can contribute to a more nuanced understanding of the relationship between money and economic equilibrium.
FAQs: Addressing Common Questions about Neutral Money Theory
What is the neutrality of money theory?
The neutrality of money theory asserts that changes in the money supply affect nominal variables like prices, wages, and interest rates but not real variables such as economic productivity, output, or employment. This concept was introduced by economist Friedrich A. Hayek and forms a foundational assumption underlying most macroeconomic theories.
Does neutrality of money mean that changes in the money supply don’t impact inflation?
No, neutrality of money does not imply that changes in the money supply have no effect on inflation or prices. The theory merely suggests that, in the long run, alterations to the money supply do not influence real economic conditions such as productivity, employment, or output.
What are some criticisms of the neutrality of money theory?
Critics argue against the theory’s applicability both in the short term and the long term. Some economists like John Maynard Keynes, Ludwig von Mises, Paul Davidson, and the post-Keynesian and Austrian schools of economics dispute its validity. Empirical evidence from several econometric studies indicates that changes in the money supply can affect relative prices over extended periods.
What is superneutrality of money?
Superneutrality of money is a stronger version of the neutrality of money theory, which assumes not only price level neutrality but also growth rate neutrality. It postulates that fluctuations in the money supply growth rate do not impact real variables like economic productivity, output, or employment.
How has the neutrality of money theory evolved historically?
The concept emerged from classical economics between 1750 and 1870, where it was initially believed that changes in the money supply could not affect output or employment even in the short term. However, as economists like Hayek later redefined the term, its meaning shifted to reflect the general equilibrium framework of neoclassical and neo-Keynesian economics. The neutrality of money theory is still a topic of ongoing debate among various schools of thought in macroeconomics.