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Unit of Account, Medium of Exchange, and Prices

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  • Young Sik Kim

    ()
    (epartment of Economics & SIRFE, Seoul National University, Seoul, South Korea)

  • Manjong Lee

    ()
    (Department of Economics, Korea University, Seoul, South Korea)

Abstract

The separation of a unit of account (UoA) from a medium of exchange (MoE) in the commodity-money system is investigated by considering explicitly a seller¡¯s choice with regard to posting price in terms of either an MoE or a UoA. If the likelihood of debasement of MoE or its rate is high enough and agents are sufficiently risk averse, there exists a monetary equilibrium in which price is quoted in terms of a UoA. Further, a UoA-posting equilibrium yields the flexible nominal price, whereas an MoE-posting equilibrium yields the sticky one. This suggests that in the fiat-money system where MoE and UoA are integrated, price would not be flexibly adjusted.

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Bibliographic Info

Paper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 1104.

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Date of creation: 2011
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Handle: RePEc:iek:wpaper:1104

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Keywords: debasement; medium of exchange; unit of account; nominal price rigidity;

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  1. Rolnick, Arthur J. & Velde, François R. & Weber, Warren E., 1996. "The Debasement Puzzle: An Essay on Medieval Monetary History," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 56(04), pages 789-808, December.
  2. François Velde, 2006. "Chronicles of a deflation unforetold," Working Paper Series, Federal Reserve Bank of Chicago WP-06-12, Federal Reserve Bank of Chicago.
  3. Jovanic, Boyan & Ueda, Masako, 1997. "Contracts and Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 700-708, August.
  4. Sargent, Thomas J & Velde, Francois R, 1999. "The Big Problem of Small Change," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(2), pages 137-61, May.
  5. Fernando Lefort & Klaus Schmidt-Hebbel, 2002. "Indexation, Inflation and Monetary Policy: An Overview," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.), Indexation, Inflation and MOnetary Policy, edition 1, volume 2, chapter 1, pages 001-018 Central Bank of Chile.
  6. Redish,Angela, 2000. "Bimetallism," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521570916.
  7. Arthur J. Rolnick & François R. Velde & Warren E. Weber, 1995. "The debasement puzzle: an essay on medieval monetary policy," Working Papers, Federal Reserve Bank of Minneapolis 536, Federal Reserve Bank of Minneapolis.
  8. D. Aliprantis, C. & Camera, G. & Puzzello, D., 2007. "Anonymous markets and monetary trading," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(7), pages 1905-1928, October.
  9. Camera, Gabriele & Winkler, Johannes, 2003. "International monetary trade and the law of one price," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(7), pages 1531-1553, October.
  10. Glassman, Debra & Redish, Angela, 1988. "Currency depreciation in early modern England and France," Explorations in Economic History, Elsevier, Elsevier, vol. 25(1), pages 75-97, January.
  11. Russell W. Cooper & Hubert Kempf., 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12.
  12. White, Lawrence H, 1984. "Competitive Payments Systems and the Unit of Account," American Economic Review, American Economic Association, American Economic Association, vol. 74(4), pages 699-712, September.
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