On the Neutrality of Money

Abstract

The neutrality of changes in the monetary base and reserve requirements is examined assuming the existence of two forms of money and an arbitrary number of other financial assets. Necessary and sufficient conditions for a policy to be neutral are developed. Several forms of institutional structure for the banking system are examined to see whether these structures satisfy the derived necessary conditions. It is shown that reserve requirement changes are neutral under very restrictive conditions. Moreover, even the neutrality of monetary base changes requires that money maintenance cost functions be homogeneous of degree zero in nominal money and prices.