Modeling money non-neutrality in macroeconomics: The role of money illusion

Whether money is neutral — whether changes in its supply move only prices and not real variables — matters because monetary policy depends on the answer. This paper gives a short history of how macroeconomists have modelled non-neutrality, reconsiders money illusion, which modern analyses often exclude on dogmatic grounds, and looks at ways to reconcile it with modern macroeconomics.