The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Neutrality of Money

  • Don Patinkin
Reference work entry


‘Neutrality of money’ is a shorthand expression for the basic quantity-theory proposition that it is only the level of prices in an economy, and not the level of its real outputs, that is affected by the quantity of money which circulates in it. Thus the notion – though not the term – goes back to early statements of the quantity theory, such as the classic one by David Hume in his 1752 essays ‘Of Money’, ‘Of Interest’ and ‘Of the Balance of Trade’. At that time the notion also served as one of the arguments against the mercantilist doctrine that the wealth of a nation was to be measured by the quantity of gold (which in 18th-century England constituted a – if not the – major form of metallic money: Feaveryear 1963, p. 158) that it possessed. The term itself is much more recent. Though attributed by Hayek (1935, pp. 129–31) to Wicksell, it is actually due to continental economists in the late 1920s and early 1930s to whom Hayek also refers (see 1935, pp. 129–31; see also Patinkin and Steiger 1988).


Homogeneity postulate Homogeneity property Hume, D. Inflation Inside and outside money Intermediate products IS-LM model Liquidity preference Money illusion Money supply Neutrality of money Nominal interest rate Perfect foresight Phillips curve Quantity theory of money Rational expectations Real interest rate Superneutrality Time preference 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Archibald, G.C., and R.G. Lipsey. 1958. Monetary and value theory: A critique of Lange and Patinkin. Review of Economic Studies 28: 50–56.CrossRefGoogle Scholar
  2. Bailey, M.J. 1956. The welfare cost of inflationary finance. Journal of Political Economy 64: 93–110.CrossRefGoogle Scholar
  3. Barro, R.J. 1976. Rational expectations and the role of monetary policy. Journal of Monetary Economics 2: 1–32.CrossRefGoogle Scholar
  4. Barro, R.J. 1978. Unanticipated money, output, and the price level in the United States. Journal of Political Economy 86: 549–580.CrossRefGoogle Scholar
  5. Birati, A., and A. Cukierman. 1979. The redistributive effects of inflation and of the introduction of a real tax system in the US bond market. Journal of Public Economics 12: 125–139.CrossRefGoogle Scholar
  6. Boschen, J.F., and H.I. Grossman. 1982. Tests of equilibrium macroeconomics using contemporaneous monetary data. Journal of Monetary Economics 10: 309–333.CrossRefGoogle Scholar
  7. Brock, W.A. 1974. Money and growth: The case of long run perfect foresight. International Economic Review 15: 750–777.CrossRefGoogle Scholar
  8. Cecchetti, S.G. 1986. Testing short-run neutrality. Journal of Monetary Economics 17: 409–423.CrossRefGoogle Scholar
  9. Feaveryear, A. 1963. The pound sterling: A history of english money. 2nd ed., revised by E.V. Morgan. Oxford: Clarendon Press.Google Scholar
  10. Feldstein, M. 1982. Inflation, capital taxation, and monetary policy. In Inflation: Causes and effects, ed. R.E. Hall. Chicago: University of Chicago Press.Google Scholar
  11. Fischer, S. 1977. Long-term contracts, rational expectations, and the optimal money supply rule. Journal of Political Economy 85: 191–205.CrossRefGoogle Scholar
  12. Fischer, S. 1980. On activist monetary policy with rational expectations. In Rational expectations and economic policy, ed. S. Fischer. Chicago: University of Chicago Press.Google Scholar
  13. Fisher, I. 1907. The rate of interest. New York: Macmillan.Google Scholar
  14. Fisher, I. 1913. The purchasing power of money: Its determination and relation to credit interest and crises. Rev. ed. New York: Macmillan. Reprinted, New York: Augustus M. Kelley, 1963.Google Scholar
  15. Fisher, I. 1923. The business cycle largely a ‘Dance of the Dollar’. Journal of the American Statistical Association 18: 1024–1028.CrossRefGoogle Scholar
  16. Fisher, I. 1930. The theory of interest. New York: Macmillan. Reprinted, New York: Kelley and Millman, 1954.Google Scholar
  17. Friedman, M. 1970. The counter-revolution in monetary theory. London: Institute of Economic Affairs.Google Scholar
  18. Gale, D. 1982. Money: In equilibrium. Cambridge: Cambridge University Press.Google Scholar
  19. Gordon, R.J. 1982. Price inertia and policy ineffectiveness in the United States, 1890–1980. Journal of Political Economy 90: 1087–1117.CrossRefGoogle Scholar
  20. Grandmont, J.-M. 1983. Money and value: A reconsideration of classical and neoclassical monetary theories. New York: Cambridge University Press.CrossRefGoogle Scholar
  21. Gurley, J.G., and E.S. Shaw. 1960. Money in a theory of finance. Washington, DC: Brookings Institution.Google Scholar
  22. Hayek, F.A. 1935. Prices and production. 2nd ed. London: Routledge and Kegan Paul.Google Scholar
  23. Howitt, P., and D. Patinkin. 1980. Utility function transformations and money illusion: Comments. American Economic Review 70 (819–22): 826–828.Google Scholar
  24. Hume, D. 1752. ‘Of money’, ‘Of interest’ and ‘Of the balance of trade’. As reprinted in D. Hume, Writings on economics, ed. E. Rotwein, Wisconsin: University of Wisconsin Press, 1970.Google Scholar
  25. Keynes, J.M. 1923. A tract on monetary reform. London: Macmillan.Google Scholar
  26. Kleiman, E. 1984. Alut ha-inflatzya [The costs of inflation]. Rivon Le-kalkalah [Economic Quarterly] 30: 859–864.Google Scholar
  27. Kuznets, S. 1941. National income and its composition, 1919–1938. New York: National Bureau of Economic Research.Google Scholar
  28. Kuznets, S. 1951. National income and industrial structure. Proceedings of the International Statistical Conferences 1947 5: 205–239. As reprinted in S. Kuznets, Economic Change, London: William Heinemann, 1954.Google Scholar
  29. Leontief, W. 1936. The fundamental assumption of Mr Keynes’ monetary theory of unemployment. Quarterly Journal of Economics 51: 192–197.CrossRefGoogle Scholar
  30. Levhari, D., and D. Patinkin 1968. The role of money in a simple growth model. American Economic Review 58: 713–753. As reprinted in Patinkin (1972c), 205–242.Google Scholar
  31. Lothian, J.R. 1985. Equilibrium relationships between money and other economic variables. American Economic Review 75: 828–835.Google Scholar
  32. Lucas, R.E., Jr. 1972. Expectations and the neutrality of money. Journal of Economic Theory 4: 103–124. As reprinted in Lucas (1981), 66–89.Google Scholar
  33. Lucas, R.E., Jr. 1975. An equilibrium model of the business cycle. Journal of Political Economy 83: 1113–1144. As reprinted in Lucas (1981), 179–214.Google Scholar
  34. Lucas, R.E. Jr. 1980. Two illustrations of the quantity theory of money. American Economic Review 70: 1005–1014.Google Scholar
  35. Lucas, R.E. Jr. 1981. Studies in business cycle theory. Cambridge, MA: MIT Press.Google Scholar
  36. McCallum, B.T. 1980. Rational expectations and macroeconomic stabilization policy: An overview. Journal of Money, Credit, and Banking 12: 716–746.CrossRefGoogle Scholar
  37. Metzler, L.A. 1951. Wealth, saving and the rate of interest. Journal of Political Economy 59: 93–116.CrossRefGoogle Scholar
  38. Mishkin, F.S. 1982. Does anticipated monetary policy matter? An econometric investigation. Journal of Political Economy 90: 22–51.CrossRefGoogle Scholar
  39. Mishkin, F.S. 1983. A rational expectations approach to macroeconometrics. Chicago: University of Chicago Press.CrossRefGoogle Scholar
  40. Modigliani, F. 1944. Liquidity preference and the theory of interest and money. Econometrica 12: 45–88. As reprinted in American Economic Association. Readings in Monetary Theory. Philadelphia: Blakiston for the American Economic Association, 1951.Google Scholar
  41. Mundell, R.A. 1963. Inflation and real interest. Journal of Political Economy 71: 280–283.CrossRefGoogle Scholar
  42. Mundell, R.A. 1965. A fallacy in the interpretation of macroeconomic equlibrium. Journal of Political Economy 73: 61–66.CrossRefGoogle Scholar
  43. Patinkin, D. 1965. Money, interest, and prices. 2nd ed. New York: Harper & Row.Google Scholar
  44. Patinkin, D. 1972a. On the short-run non-neutrality of money in the quantity theory. Banca Nazionale del Lavoro Quarterly Review 100: 3–22.Google Scholar
  45. Patinkin, D. 1972b. Money and growth in a Keynesian full-employment model. In Patinkin (1972c).Google Scholar
  46. Patinkin, D. 1972c. Studies in monetary economics. New York: Harper & Row.Google Scholar
  47. Patinkin, D., and O. Steiger. 1988. On the terms ‘neutrality of money’ and ‘veil of money’. Scandinavian Journal of Economics 90.Google Scholar
  48. Robertson, D.H. 1922. Money. Cambridge: Cambridge University Press.Google Scholar
  49. Sargent, T.J. 1976. A classical macroeconometric model for the United States. Journal of Political Economy 84: 207–237.CrossRefGoogle Scholar
  50. Sidrauski, M. 1967. Rational choice and patterns of growth in a monetary economy. American Economic Review 57: 534–544.Google Scholar
  51. Solow, R.M. 1956. A contribution to the theory of economic growth. Quarterly Journal of Economics 70: 65–94.CrossRefGoogle Scholar
  52. Tobin, J. 1965. Money and economic growth. Econometrica 33: 671–684.CrossRefGoogle Scholar
  53. Tobin, J. 1967. The neutrality of money in growth models: A comment. Economica 34: 69–72.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Don Patinkin
    • 1
  1. 1.