Monetary neutrality is one of the major and the most controversial economic theories, which claims that money as a concept can influence the rise or decline of prices exclusively. Thus, it does not control the overall state economy and the country’s gross domestic product (GDP).
Explanation:
Various researchers of the field now question the definition of monetary neutrality as an economic term due to its ambiguity in the context of the modern economy. Since the concept genesis in the early 20th century, scientists relied on the data collected earlier, and the study showed that variations with money influence wages and prices but not the economy in general. For example, speaking of the US economic system, according to the monetary neutrality theory, the amount of money printed by the Federal Reserve does not directly impact full-scale inflation in the country. On the contrary, it, to a great extent, influences the prices for goods and services as well as average wages.
However, in the context of the economic development in the 21st century, the aforementioned statement is brought into a continuous discussion as its relevance seems to be outdated for the researchers. Due to more rapid economic development during the past decades, the importance of price has come to a relatively new level. Any change in the amount of money printed by the Federal Reserve immediately marks further development directions for the country’s economy in the near future. Hence, although the theory of monetary neutrality is not yet rejected, its impact on the state economy today differs significantly in terms of closer interdependence of prices on products and GDP. Even if the theory works for the patterns of economic development in the long run, it is mostly irrelevant for shorter time intervals.