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Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate

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  • Buiter, Willem H.

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.

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  • Buiter, Willem H., 2007. "Is Numérairology the Future of Monetary Economics? Unbundling Numéraire and Medium of Exchange Through a Virtual Currency and a Shadow Exchange Rate," CEPR Discussion Papers 6099, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6099
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    Cited by:

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    4. Beatriz de Blas & James Costain, 2012. "Smoothing shocks and balancing budgets in a currency union^M," 2012 Meeting Papers 975, Society for Economic Dynamics.
    5. Katrin Assenmacher & Signe Krogstrup, 2018. "Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money," IMF Working Papers 2018/191, International Monetary Fund.
    6. Costain, James & de Blas, Beatriz, 2012. "The role of fiscal delegation in a monetary union: a survey of the political economy issues," Working Papers in Economic Theory 2012/11, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).

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    More about this item

    Keywords

    cashless economy; optimal inflation; price level determinacy; zero lower bound;
    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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