DP6099 Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate
|Author(s):||Willem H. Buiter|
|Publication Date:||February 2007|
|Keyword(s):||cashless economy, optimal inflation, price level determinacy, zero lower bound|
|JEL(s):||E3, E4, E5, E6|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6099|
The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numÃ©raire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numÃ©raire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numÃ©raire ('sterling') and the means of payment ('drachma'). The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numÃ©raire used in private transactions. The second is the proposition that price stability in terms of that numÃ©raire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numÃ©raire from the currency: doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numÃ©rairology - the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.