Question

Explain the “policy ineffectiveness paradigm” arising from the superneutrality of money argument and its implications for monetary policy.

Answer 1

Super neutrality of money is an argument proposed by many scholars who believe that the growth rate of money supply does not have any real effect in the long run economy which has become accustomed to the constant money supply growth rate. It indicates that whenever the central bank conduction open market operations and purchase bonds from the public the total supply of credit does not change because the reduction in the private credit is equally matched by the increase in the credit obtained by the central bank.

This also indicates that there is no trade off between the desire to stimulate the investment by reducing the interest rate and the stability of the price level because Central banks action will not affect the price level. This makes the monetary policy ineffective because any open market operation will not stimulate the investment so that the aggregate demand can shift outband initiate an increase the real GDP of the economy.