ABSTRACT
The Cantillon effect constitutes an important argument in the debate on neutrality of money. This chapter explains what the economists mean when they say that money is neutral, providing the necessary context for the proper understanding of the first-round effect. In other words, the chapter presents a typology of money neutrality, focusing on the dynamic neutrality, which is often identified with neutrality of money and is the most relevant for the monetary policy. It provides a comprehensive list of conditions that must be met for money to be neutral from the dynamic point of view and shows that these conditions are not actually met, which implies that changes in the money supply are never neutral, even in the long term. The chapter concludes that economists draw wrong conclusions about money neutrality because they confuse the static and dynamic analyses, and they pay too much attention to the impact of the changes in the money supply on the general price level and too little to the impact on the structure of relative prices.
