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Is Numérairology the Future of Monetary Economics?

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  • Willem Buiter

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Abstract

The paper discusses some fundamental problems in monetary economics associated with the determination 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 the numéraire and medium of exchange/means of payment functions of money. The monetary authorities manage 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 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 numéraire used in private transactions. The second is the proposition that price stability in terms of that numéraire is the appropriate objective of monetary policy. The paper also discusses 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 nominal rigidities, monetary economics needs to devote more attention to numérairology—the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Willem Buiter, 2007. "Is Numérairology the Future of Monetary Economics?," Open Economies Review, Springer, vol. 18(2), pages 127-156, April.
  • Handle: RePEc:kap:openec:v:18:y:2007:i:2:p:127-156
    DOI: 10.1007/s11079-007-9035-7
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    References listed on IDEAS

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    Cited by:

    1. Cordelius Ilgmann & Martin Menner, 2011. "Negative nominal interest rates: history and current proposals," International Economics and Economic Policy, Springer, vol. 8(4), pages 383-405, December.
    2. Buiter, Willem H., 2009. "Negative nominal interest rates: Three ways to overcome the zero lower bound," The North American Journal of Economics and Finance, Elsevier, vol. 20(3), pages 213-238, December.
    3. Christian Pfister, Natacha Valla, 2018. "‘New Normal’ or ‘New Orthodoxy’? Elements of a Central Banking Framework for the After-Crisis," Working papers 680, Banque de France.
    4. Ilgmann, Cordelius, 2011. "Silvio Gesell: 'a strange, unduly neglected' monetary theorist," CAWM Discussion Papers 23, University of Münster, Center of Applied Economic Research Münster (CAWM).

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    More about this item

    Keywords

    Zero lower bound; Cashless economy; Price level determinacy; Optimal inflation; E3; E4; E5; E6;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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