Money, Expectations, and Economic Growth

by Frank Shostak

In various writings, Milton Friedman argued that there is a variable lag between changes in money supply and its effect on real output and prices. Friedman held that in the short run changes in money supply will be followed by changes in real output. However, in the long run changes in money will only have an effect on prices. This means, according to Friedman, that changes in money with respect to real economic activity tend to be neutral in the long run and non-neutral in the short run.

In the short-run, which may be as much as five or ten years, monetary changes affect primarily output. Over decades, on the other hand, the rate of monetary growth affects primarily prices.1

Friedman was of the view that the main reason for the non-neutrality of money in the short run is the variability in the time lag between money and the economy. On this Friedman suggested,

Continue Reading at…