Lucas and Hume on Monetary Non-Neutrality: A Tension between the Logic and the Technique of Economics

The Center for the History of Political Economy Working Paper Series No. 2015-01

39 Pages Posted: 20 Mar 2015

Date Written: March 18, 2015

Abstract

Translation of old economic doctrines into new technical frameworks led the profession to lose a valid theory of monetary non-neutrality. The theory relates to how additional money diffuses through the economy after entering at different points. Diffusion takes time, redistributes resources, and changes relative prices. This theory of the non-neutrality of money was introduced into economics by David Hume, among others, but it has since disappeared from the leading conversations on monetary non-neutrality. However, the disappearance was not caused by any theoretical or empirical weakness. Using Lucas's Nobel lecture as my point of departure, I argue that it disappeared because it did not fit into the popular technical frameworks.

Keywords: non-neutrality of money, Lucas, Hume

JEL Classification: B11, B41, E31, E32

Suggested Citation

Bilo, Simon, Lucas and Hume on Monetary Non-Neutrality: A Tension between the Logic and the Technique of Economics (March 18, 2015). The Center for the History of Political Economy Working Paper Series No. 2015-01, Available at SSRN: https://ssrn.com/abstract=2580408 or http://dx.doi.org/10.2139/ssrn.2580408

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