The Applicability Of Neutral Money Theory In Supply & Demand Situations

Since the neutral money theory appeared, the controversy began and has not come to an agreement yet. Different school got various argumentations based on the different hypothesis and angles. The observation at long time of economic history found that the impact from the change of monetary stock caused by main economy’s monetary policy varies in different history time. Therefore, we can see the theoretical and practical significance from the verification on applicability of neutral money theory.The general supply and demand situation is the upper hypothesis of macroeconomic theory. The law of development on economic history demonstrates that different theories should be applied in different economical operation, that we can even amend the existing theory based on different premise hypotheses. This paper will reargue the validity of neutral money theory in logical and empirical way respectively, based on China’s and America’s economic history analysis and the upper hypothesis including supply and demand situation.According to the running of supply constraint economy, general supply could be the choke point of economic growing. When money supply shocks, the demand in the market will be on the rise but the output’s increase is unapparent, meaning that neutral money theory is applicable. When it comes to the demand constraint economy, demand is driving force of economic growing, which means money supply shocks can bring obvious output growing and neutral money theory is invalid.Moreover, this paper will use China’s and America’s currency data in history time to structure VAR model of M2 and real GDP/GNP and FS model for LRD testing, verifying the validity of neutral money theory in a supply constraint economy and the positive but moderate monetary effect to real output in a demand constraint economy.