Monetary Superneutrality is an advanced concept in monetary economics that suggests changes in the rate of growth of the money supply do not affect real variables in an economy in the long run. This principle extends the idea of monetary neutrality, which states that changes in the money supply only affect nominal variables like prices and wages, not real variables like output or employment.
Theoretical Background
Monetary Superneutrality is closely linked to classical economic theories and the Quantity Theory of Money. According to the Quantity Theory, the money supply times the velocity of money equals the price level times real output:
where:
- \( M \) = Money supply
- \( V \) = Velocity of money
- \( P \) = Price level
- \( Y \) = Real output
For monetary superneutrality to hold, changes in the growth rate of \( M \) should only influence \( P \), while \( Y \) remains unaffected.
Implications and Applicability
- Inflation: According to monetary superneutrality, a higher growth rate of money supply would lead to proportionally higher inflation without changing real economic output.
- Long-term Economic Policies: Central banks and policymakers often consider this principle when formulating long-term economic policies, understanding that how money supply influences economic growth might be limited.
Types and Considerations
Short versus Long Term
- Short-Term (Non-Superneutrality): In the short run, money supply changes can influence real variables due to price and wage rigidities.
- Long-Term (Superneutrality): Over the long run, these adjustments should dissipate, fulfilling the condition of superneutrality.
Classical versus New Classical Views
- Classical Economics: Stresses that money is primarily a medium of exchange and cannot affect real economic variables in the long term.
- New Classical Economics: Supports a similar stance but incorporates rational expectations and market efficiency.
Examples and Historical Context
Empirical Evidence
Empirical studies on various economies have mixed results regarding monetary superneutrality. Some economies show strong signs of inflationary response to money supply changes without affecting real variables, whereas others observe deviations due to factors like monetary policy frameworks and economic structure.
Related Terms and Comparisons
Monetary Neutrality
- Monetary Neutrality: States changes in the money supply only affect nominal variables in the short run.
- Comparison: Monetary neutrality is about short-term effects, while superneutrality extends to longer-term considerations.
FAQs
Does monetary superneutrality hold universally?
What is the main criticism of monetary superneutrality?
References
- Friedman, M. (1969). The Optimum Quantity of Money and Other Essays. Chicago: Aldine Publishing Company.
- Jovanovic, B., & Lach, S. (1989). Entry, Exit, and Diffusion with Learning by Doing. American Economic Review, 79(4), 690-699.
Summary
Monetary Superneutrality emphasizes the limitation of money growth in impacting real economic variables in the long term. This principle is central to formulating monetary policies and understanding inflation dynamics. While theoretical support is robust, empirical evidence varies, necessitating nuanced applications in different economic contexts.
