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Hayek on the Neutrality of Money

In: Studies in Austrian Macroeconomics

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  • Steven Horwitz

Abstract

The concept of “neutral money” has a long history in monetary theory and macroeconomics. Like a number of other macro concepts, its meaning has been subject to a variety of interpretations over the decades. I explore the way in which Hayek used this term in his monetary writings in the 1930s and argue that “neutrality” for Hayek was best understood as the idea that monetary institutions were ideal if money, and changes in its supply, did not independently affect the process of price formation and thereby create false signals leading to economic discoordination, and especially of the intertemporal variety. This view was rooted in his work on money and the trade cycle in the late 1920s and early 1930s and also bound up with his understanding of “equilibrium theory.” The importance of his concept of neutrality was that it served as a benchmark for judging the comparative effectiveness of different monetary regimes and policies. That use is still relevant today.

Suggested Citation

  • Steven Horwitz, 2016. "Hayek on the Neutrality of Money," Advances in Austrian Economics, in: Steven Horwitz (ed.), Studies in Austrian Macroeconomics, volume 20, pages 61-78, Emerald Publishing Ltd.
  • Handle: RePEc:eme:aaeczz:s1529-213420160000020004
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    Keywords

    Neutrality of money; general equilibrium; price level stabilization; Hayek; business cycles; B22; B25; E30; E52;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B25 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Historical; Institutional; Evolutionary; Austrian; Stockholm School
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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