Is Numérairology the Future of Monetary Economics?Unbundling numéraire and medium of exchange through a virtual currency and a shadow exchange rate

Willem Hendrik Buiter

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: The paper discusses some fundamental problems in monetary economics associated with thedetermination and role of the numéraire. The issues are introduced by formalising a proposal,attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling thenuméraire and medium of exchange/means of payment functions of money. The monetary authoritiesmanage the exchange rate between the numéraire ('sterling') and the means of payment ('drachma').The short nominal interest rate on sterling bonds can then be used to target stability for the sterlingprice level. The paper puts question marks behind two key bits of conventional wisdom incontemporary monetary economics. The first is the assumption that the monetary authorities defineand determine the numéraire used in private transactions. The second is the proposition that pricestability in terms of that numéraire is the appropriate objective of monetary policy. The paper alsodiscusses the merits of the next step following the decoupling of the numéraire 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 nominalrigidities, monetary economics needs to devote more attention to numérairology - the study of theindividual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.

Keywords: Zero lower bound; cashless economy; price level determinacy; optimal inflation (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 E6 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-01
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Related works:
Working Paper: Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate (2007)
Working Paper: Is Numerairology the Future of Monetary Economics? Unbundling numeraire and medium of exchange through a virtual currency and a shadow exchange rate (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0776

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