Monetarism, New Keynesianism, and Real Business Cycles Assume Money Is Neutral; Austrians Assume Money Is Non-Neutral

The neutrality of money holds a central place in modern macroeconomics and monetary economics. In the long run, changes in the supply of money do not affect real variables such as the level of gross domestic product (GDP), the growth rate of GDP, or the rate of unemployment. Changes in the money supply do not alter relative prices; that is, the ratio of prices between goods and services remains the same after a monetary contraction or expansion takes place. Variations in the money supply only influence the aggregate price level. All prices change equally when the money supply changes. Increases or decreases in the money supply alter only the level of nominal variables. Most macroeconomic models accept this proposition, at least for the long run. For example, both Monetarism and New Keynesianism accept the long-run neutrality of money. Models of real business cycles begin with the assumption that money is neutral in both the long and short run.

In sharp contrast, the non-neutrality of money has a central role within the Austrian approach to monetary economics. Increases in the money supply do affect relative prices and real variables in the short run. Changes in the supply of money alter relative prices, which influence individual decision-making regarding the types of goods and services to consume. Either increases or decreases in the money supply affect the market rate of interest. As a result, savings and investment patterns change. Money has a non-neutral impact on the economy.

--J. Robert Subrick, "Money Is Non-Neutral," in Handbook on Contemporary Austrian Economics, ed. Peter J. Boettke (Cheltenham, UK: Edward Elgar, 2010), 111.