Neutral Money: Historical Fact or Analytical Artifact?

Abstract

Long-run neutrality of money is an artifact of a particular theoretical framework. We advance an alternative though not contradictory theoretical framework where monetary processes exert lasting real effects. Our framework holds without rejecting the classical equilibrium condition that nominal values are independent of economic realities because the two frameworks are non-commensurable. The real effects that we explore stem from the distribution of monetary injection among potential entrepreneurial experiments. The selected experiments influence the pattern of activity within society, which leads to changes in the standard given conditions of wants, knowledge, and expectations. These changes unravel into alternative paths of history.

Keywords: neutral money, Cantillon effects, business cycles, non-equilibrium modeling, kaleidics vs. equilibrium, learning by doing, money as commanding height

JEL Classification: B31, E32, E42, E52