A large part of life is expectations: managing them, dealing with them, having them...or not. This is what American macroeconomist Robert J. Barro, prof at Harvard, really wanted people to know in the late 1970s and beyond.
Barro put forth the idea that measuring the effect of “money growth” on the economy as a factor on its own...is a mistake. Money growth means the expansion of the money supply, where the central bank pumps more dollar bills into the system, oftentimes in the form of buying bonds from banks, giving them a cash infusion. Barro argued that, if everyone anticipated money growth, prices would go up accordingly in a one-to-one ratio. In other words: pumping more money into the economy when everyone expects it just leads to inflation, and not much else. Bummer.
Unanticipated money growth, on the other hand, is another story. When nobody knows it’s coming, businesses don’t raise prices in anticipation of the expansion of the money supply. Sure, they’ll notice eventually, but this effect will be lagged. That gives the economy a chance to actually use that infusion of money before it disappears into inflation.
That’s a big deal, because it can affect things like unemployment and GDP. Of course, a lot of other factors affect unemployment and GDP, but still. Barro’s got a point, with empirical data to back up his theories.
To Barro, context is key. Whether or not people know about impending monetary policy will greatly determine the actual effect of that monetary policy. Once-Fed-Chair Al Greenspan was famous for “Greenspeak," which is where he would ramble and not really answer questions about his monetary policy plans. Al wasn’t cray. He did this on purpose, because he didn’t want everyone anticipating his movements, which might render his movements useless.
Notably, Fed Chairs since haven’t been Greenspeaking. For the most part, they announce what’s happening. But who knows...maybe that’s a part of their plan, too: making people behave a certain way by merely announcing something, even before that something is actually implemented...like changes in interest rates.
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Econ: What are the Neutrality and Supern...18 Views
And finance Allah Shmoop What are the neutrality and super
neutrality of money All right people your money just doesn't
care You let your money pick whatever it wants to
have for breakfast Hey cash stack Waffles or pancakes Yeah
it doesn't care Timeto unwind in front of the TV
Well you ask your money Do you wanna watch game
of thrones or Black mirror Your money shrugs It just
doesn't care That's the neutrality of money But there's another
kind of neutrality of money as well Here in an
economic sense the term neutrality of money means that changes
in the money supply You know the amount of money
in the system sloshing around out there doesn't impact the
rial variables in the economy Stuff like underlying supply and
demand or the unemployment rate or the amount of output
in the economy Those things don't get fundamentally changed by
the amount of cash floating around Well the amount of
money can affect what's called nominal variables Things like prices
and wages But it doesn't impact the rial variables So
it isn't that your money doesn't care about you It's
that the economy doesn't care about money Wait isn't money
what the economy is all about We goto work to
get money right That's the reason we work We spend
money on everything we need to buy money Is the
purpose of the economy right Well no not really The
economy is about Resource is in labor You take stuff
like a tree or some iron or from the ground
You add a little human ingenuity and the elbow grease
and boom You get a house you know or a
car or a flying pizza delivery drone or something like
that Well money is just a way to move things
along efficiently It makes it so that we don't have
to barter for everything Like say there's not much money
in the economy not a lot of cash Prices are
low You can buy a brand new taffy pulling machine
for one hundred bucks Okay now let's dump a whole
bunch of extra money into the system Now there's ten
times as much cash as there was before That's going
to cause a lot of disruption right Massive inflation It'll
take some time to adjust but once the economy gets
used to all that additional cash well everything evens out
the price you pay for your taffy puller is now
much higher Numerically it costs a thousand dollars instead of
one hundred dollars But the basic factors of the economy
stay the same People want the same amount of taffy
as they did before Demand is the same You can
still get the taffy puller you wanted Supply stays the
same on ly prices changed with the money that was
added to the system there So that's the neutrality of
money Nominal prices and nominal wages are influenced by the
amount of money in the system but the underlying conditions
remain the same Well that's the theory anyway However not
everyone agrees with this theory Working in practice One example
While the United States government is a neutrality of money
skeptic how do we know Well because if the theory
is true then the Fed or Federal Reserve can't do
anything to manage the economy Nothing It does boost long
term economic growth and it can't do anything to increase
employment There is also a class of economists who hold
a middle position They argue that changes in the amount
of money can have a short term In fact a
surge of cash will prompt spending in the short term
Give people a bunch of fat stacks of cash and
well they'll spend him You know instant demand boost But
the's economists don't think the effect last too long Eventually
people get used to the new amounts of cash Prices
go up The extra money they have doesn't come with
any additional buying power and it kind of settles into
a groove there Right things eventually settle into the same
underlying patterns as they were in before But during the
transition period there can be a measurable albeit fleeting impact
So what is super neutrality than money that really doesn't
care Well the theory of super neutrality says that not
only does the level of money not matter but the
rate of supply change doesn't matter either That is add
money faster added slow It doesn't impact things like output
or unemployment And as for your money's preference for breakfast
foods or TV shows while you may never get an
answer just don't ask whether it prefers D C or
marvel Your money may never shut up Been there done
that
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