<p>I looked at “Monetary Economics: Theory and Policy” by Bennett T. McCallum. On page 95, he describes what he refers to as “the Classical Model”, where the money supply is set outside the model (exogenous). In the Classical Model, if the money supply is changed, nominal values in equilibrium change, but ratios like wage/prices and real values do not. (The implication being that nominal GDP changes proportionally to the money supply, but real GDP is fixed.) He describes this as money neutrality, and it matches the description in the question.</p>

<p>I do not know how money neutrality can be defined for models where the money supply is determined within the model (endogenous).</p>

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2017-12-19T23:23:52.490Z
2017-12-19T23:23:52.490Z
Brian Romanchuk
<p>If money neutrality stipulates that only nominal variables will be affected following changes in money supply, then does this mean that following such money supply changes, real GDP remains unchanged while nGDP changes, as changes in money supply causes changes in price levels, and nGDP is by definition real GDP (which is unchanged) * price level deflator?</p>

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2017-12-19T19:45:13.277Z
My reading is that yes, real GDP is unchanged, just nominal GDP moves. I am not a fan of money neutrality as a concept, and so I am not familiar enough with it to list this as an answer. If you find a formal definition of money neutrality, it should discuss this.
Brian Romanchuk
<money-supply>
Does money neutrality mean that nominal GDP (output) changes following changes in money supply?
tsp216
# Does money neutrality mean that nominal GDP (output) changes following changes in money supply?

(Asked by: username_0 on 2017-12-18)

If money neutrality stipulates that only nominal variables will be affected following changes in money supply, then does this mean that following such money supply changes, real GDP remains unchanged while nGDP changes, as changes in money supply causes changes in price levels, and nGDP is by definition real GDP (which is unchanged) \* price level deflator?

**Tags:** money-supply
> **Comments:**
> **username_1**: My reading is that yes, real GDP is unchanged, just nominal GDP moves. I am not a fan of money neutrality as a concept, and so I am not familiar enough with it to list this as an answer. If you find a formal definition of money neutrality, it should discuss this.  

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## 1 answers

### Answer by username_1 on 2017-12-19. Score: 1

I looked at “Monetary Economics: Theory and Policy” by Bennett T. McCallum. On page 95, he describes what he refers to as “the Classical Model”, where the money supply is set outside the model (exogenous). In the Classical Model, if the money supply is changed, nominal values in equilibrium change, but ratios like wage/prices and real values do not. (The implication being that nominal GDP changes proportionally to the money supply, but real GDP is fixed.) He describes this as money neutrality, and it matches the description in the question.

I do not know how money neutrality can be defined for models where the money supply is determined within the model (endogenous).


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