March, 2015

Lucas and Hume on Monetary Non-Neutrality

A Tension between the Logic and the Technique of Economics
  • Simon Bilo

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Translation of old economic doctrines into new technical frameworks led the profession to lose a valid theory of monetary non-neutrality. The theory relates to how additional money diffuses through the economy after entering at different points. Diffusion takes time, redistributes resources, and changes relative prices. This theory of the non-neutrality of money was introduced into economics by David Hume, among others, but it has since disappeared from the leading conversations on monetary non-neutrality. However, the disappearance was not caused by any theoretical or empirical weakness. Using Lucas's Nobel lecture as my point of departure, I argue that it disappeared because it did not fit into the popular technical frameworks.

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