Nobel Lecture: Monetary Neutrality

Abstract

The work for which I have received the Nobel Prize was part of an effort to understand how changes in the conduct of monetary policy can influence inflation, employment, and production. So much thought has been devoted to this question and so much evidence is available that one might reasonably assume that it had been solved long ago. But this is not the case: It had not been solved in the 1970s when I began my work on it, and even now this question has not been given anything like a fully satisfactory answer. In this lecture I shall try to clarify what it is about the problem of bringing available evidence to bear on the assessment of different monetary policies that makes it so difficult and to review the progress that has been made toward solving it in the last two decades. From the beginnings of modern monetary theory, in David Hume's marvelous essays of 1752, Of Money and Of Interest, conclusions about the effect of changes in money have seemed to depend critically on the way in which the change is effected. In formulating the doctrine that we now call the quantity theory of money, Hume stressed the units-change aspect of changes in the money stock and the irrelevance of such changes to the behavior of rational people.