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Money as a Unit of Account

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  • Schneider, Martin
  • Doepke, Matthias

Abstract

We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non-contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of "currency areas" when there is variation in the intensity of trade within and across regions.

Suggested Citation

  • Schneider, Martin & Doepke, Matthias, 2013. "Money as a Unit of Account," CEPR Discussion Papers 9700, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9700
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    2. Rodrigue Dossou-Cadja, 2024. "The 1992-93 EMS Crisis and the South: Lessons from the Franc Zone System and the 1994 CFA Franc Devaluation," Working Papers 0246, European Historical Economics Society (EHES).
    3. Grym, Aleksi, 2018. "The great illusion of digital currencies," BoF Economics Review 1/2018, Bank of Finland.
    4. Frasser, Cristian & Guzmán, Gabriel, 2020. "What do we call money? An appraisal of the money or non-money view," Journal of Institutional Economics, Cambridge University Press, vol. 16(1), pages 25-40, February.
    5. Ahnert, Toni & Assenmacher, Katrin & Hoffmann, Peter & Leonello, Agnese & Monnet, Cyril & Porcellacchia, Davide, 2022. "The economics of central bank digital currency," Working Paper Series 2713, European Central Bank.
    6. Hajime Tomura, 2021. "Nominal contracts and the payment system," The Japanese Economic Review, Springer, vol. 72(2), pages 185-216, April.
    7. Sebastian Strunz & Bartosz Bartkowski & Harry Schindler, 2017. "Is there a monetary growth imperative?," Chapters, in: Peter A. Victor & Brett Dolter (ed.), Handbook on Growth and Sustainability, chapter 15, pages 326-355, Edward Elgar Publishing.
    8. Ryan Chahrour & Rosen Valchev, 2017. "International Medium of Exchange: Privilege and Duty," Boston College Working Papers in Economics 934, Boston College Department of Economics.
    9. Cong, Lin William & Li, Ye & Wang, Neng, 2022. "Token-based platform finance," Journal of Financial Economics, Elsevier, vol. 144(3), pages 972-991.
    10. Juliane M. Begenau, 2015. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," Harvard Business School Working Papers 15-072, Harvard Business School, revised Sep 2016.
    11. Gita Gopinath & Jeremy C Stein, 2021. "Banking, Trade, and the Making of a Dominant Currency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 783-830.
    12. Claudio Borio & Anna Zabai, 2018. "Unconventional monetary policies: a re-appraisal," Chapters, in: Peter Conti-Brown & Rosa M. Lastra (ed.), Research Handbook on Central Banking, chapter 20, pages 398-444, Edward Elgar Publishing.
    13. Daisuke Ikeda, 2020. "Digital Money as a Unit of Account and Monetary Policy in Open Economies," IMES Discussion Paper Series 20-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
    14. Ye Li & Simon Mayer & Simon Mayer, 2021. "Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking," CESifo Working Paper Series 9260, CESifo.
    15. Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2021. "Optimal financing with tokens," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1038-1067.
    16. Cong, Lin William & Mayer, Simon, 2022. "The Coming Battle of Digital Currencies," Applied Economics and Policy Working Paper Series 320020, Cornell University, Department of Applied Economics and Management.
    17. Claudio Borio, 2019. "On money, debt, trust and central banking," BIS Working Papers 763, Bank for International Settlements.
    18. Hull, Isaiah & Sattath, Or, 2021. "Revisiting the Properties of Money," Working Paper Series 406, Sveriges Riksbank (Central Bank of Sweden).
    19. McLeay, Michael & Radia, Amar & Thomas, Ryland, 2014. "Money in the modern economy: an introduction," Bank of England Quarterly Bulletin, Bank of England, vol. 54(1), pages 4-13.
    20. Juliane Begenau, 2015. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," 2015 Meeting Papers 687, Society for Economic Dynamics.
    21. Pietro Cova & Lisa Rodano, 2019. "Relative price dynamics in the Euro area: where do we stand?," Temi di discussione (Economic working papers) 1226, Bank of Italy, Economic Research and International Relations Area.
    22. Toyofuku, Kenta, 2021. "Unit of account, sovereign debt, and optimal currency area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).

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    More about this item

    Keywords

    Balance-sheet risk; Credit chains; Optimal currency areas; Unit of account;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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