In the first part of the book we have surveyed the relationship between the monetary and the real sphere in different economic paradigms applying Schumpeter’s distinction between ‘real analysis’ and ‘monetary analysis’, and we have derived some implications for the relationship between monetary policy, distribution and capital accumulation. We have argued that Classical orthodoxy, Neoclassical economics, Neoclassical Synthesis, Monetarist, New Classical, but also today’s mainstream New Keynesian and New Consensus theories are dedicated to ‘real analysis’. In the long run — in New Classical theory also in the short run — the economic equilibrium is determined by real forces only. Relative prices, income distribution, output, employment and growth are determined by ‘real analysis’. Monetary variables, the quantity of base money or the base rate of interest controlled by the central bank, have real effects in the short run when nominal rigidities prevail. These real effects are therefore confined to short-run disequilibria, and in the long run monetary variables are neutral with respect to real outcomes. In long-run equilibrium, monetary policies only affect the price level or inflation. Therefore, in long-run equilibrium the Classical dichotomy between the monetary and the real sphere and Say’s law are assumed to hold. The real rate of profit, or the ‘natural rate of interest’, determines the monetary rate of interest. Money is neutral with respect to output, employment, distri

the rational expectations being reviewed continuously. In the strict sense, money is not neutral in the short-run, that is, classical dichotomy does not In macroeconomics, the classical dichotomy is the idea, attributed to classical and pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an economy exhibits the classical dichotomy if real variables such as output and real interest rates can be completely analyzed without considering what is happening to their nominal counterparts, the money value of In macroeconomics, the classical dichotomy is the idea, attributed to classical and pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an economy exhibits the classical dichotomy if real variables such as output and real interest rates can be completely analyzed without considering what is happening to their nominal counterparts, the money value of output and the interest rate. In particular, this means that real GDP and other real variables can be determined without knowing the level of the nominal money supply or the rate of inflation. An economy exhibits the classical dichotomy if money is neutral, affecting only the price level, not real variables. As such, if the classical dichotomy holds, money only affects absolute rather than the relative prices between goods. The classical dichotomy was integral to the thinking of some pre-Keynesian economists ("money as a veil") as a long-run proposition and is found today in new classical theories of macroeconomics. In new classical macroeconomics there is a short-run Phillips curve which can shift vertically according to the rational expectations being reviewed continuously. In the strict sense, money is not neutral in the short-run, that is, classical dichotomy does not hold, since agents tend to respond to changes in prices and in the quantity of money through changing their supply decisions. However, money should be neutral in the long run, and the classical dichotomy should be restored in the long-run, since there was no relationship between prices and real macroeconomic performance at the data level. This view has serious economic policy consequences. In the long-run, owing to the dichotomy, money is not assumed to be an effective instrument in controlling macroeconomic performance, while in the short-run there is a trade-off between prices and output (or unemployment), but, owing to rational expectations, government cannot exploit it in order to build a systematic countercyclical economic policy. Keynesians and monetarists reject the classical dichotomy, because they argue that prices are sticky. That is, they think prices fail to adjust in the short run, so…

Neutrality of money is the idea that a change in the money supply affects only nominal variables in the economy such as prices, wages, and exchange rates, with Neutrality of money is the idea that a change in the money supply affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption. Neutrality of money is an important idea in classical economics and is related to the classical dichotomy. It implies that the central bank does not affect the re Ne…