The monetary neutrality and its implications uponthe real economy

• Author: Alexandra Adam - Ioana Moldovan - Simona Hudea
• Position: Lecturer Assistant, Academy of Economic Studies, Bucharest - Lecturer Assistant, Academy of Economic Studies, Bucharest - Lecturer Assistant, Faculty of Economic Sciences, 'Nicolae Titulescu' University, Bucharest
• Pages: 138-148

138Lex ET Scientia. Juridical Series

LESIJ NO. XVII, VOL. 2/2010

THE MONETARY NEUTRALITY AND ITS IMPLICATIONS UPON

THE REAL ECONOMY

Alexandra ADAM*

Ioana MOLDOVAN**

Simona HUDEA***

Abstract

The monetary neutrality considers the way the monetary decisions affect the real variables

and implicitly the real economy both on short term and long run. Although early study of this

problem is rooted in the '70s, the issue is studied also nowadays, as many works aim to test

whether the long-term monetary neutrality occurs indeed at any time, in any circumstances and

regardless of the area.This paper aims to analyse the answer to the following question: How do

monetary changes affect the main macroeconomic variables, such as output, real wages and real

interest rates?

Keywords: money, real interest rate, monetary policy, real wages, real variables

Introduction

In this article we consider particularly the discussion of some key issues regarding money,

the effects on real variables in short term and long run due to its changes. To reflect this interaction

between money and real economy, we considered it necessary to display different ideas acquired

by Keynesians and Monetarists. While the debate of these economists’ opinions pertaining to these

two trends seem to be of the past, from our point of view in order to develop new theories and

ideas is absolutely necessary to study the past.

Moreover, in order to highlight the importance of interaction between money and real

economy we could not neglect monetary neutrality, which is referring to how the monetary

decisions affect real variables (and implicitly the real economy) on short term and long run.

Although early study of this problem is rooted in the '70s, the issue is studied also nowadays, as

many works aim to test whether the long-term monetary neutrality occurs indeed at any time, in

any circumstances and regardless of the area.

This paper aims to analyse the answer to the following question: How do monetary changes

affect the main macroeconomic variables, such as output, real wages and real interest rates?

The answer to the question was obtained by analyzing several reference works on the topic,

one of them being Robert Lucas’ lecture, Nobel Laureate on monetary neutrality.

The need to capture the monetary implications on socio-economic and political space from

nowadays leads us to do, above all, a periplus in the literature, covering the history and evolution

of money because the latter is, rightly so, "the central axis" of the modern society.

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* Lecturer Assistant, Academy of Economic Studies, Bucharest (e-mail: ale_adam2007@yahoo.com).

** Lecturer Assistant, Academy of Economic Studies, Bucharest (e-mail: ioana.moldovan@economie.ase.ro).

*** Lecturer Assistant, Faculty of Economic Sciences, “Nicolae Titulescu” University, Bucharest (e-mail:

caraman_simmy2005@yahoo.com).